The Annals of Applied Probability
- Ann. Appl. Probab.
- Volume 5, Number 2 (1995), 327-355.
There is no Nontrivial Hedging Portfolio for Option Pricing with Transaction Costs
Conventional wisdom holds that since continuous-time, Black-Scholes hedging is infinitely expensive in a model with proportional transaction costs, there is no continuous-time strategy which hedges a European call option perfectly. Of course, if one is attempting to dominate the European call rather than replicate it, then one can use the trivial strategy of buying one share of the underlying stock and holding to maturity. In this paper we prove that this is, in fact, the least expensive method of dominating a European call in a Black-Scholes model with proportional transaction costs.
Ann. Appl. Probab. Volume 5, Number 2 (1995), 327-355.
First available in Project Euclid: 19 April 2007
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Mathematical Reviews number (MathSciNet)
Zentralblatt MATH identifier
Secondary: 90A12 60H30: Applications of stochastic analysis (to PDE, etc.) 93E20: Optimal stochastic control
Soner, H. M.; Shreve, S. E.; Cvitanic, J. There is no Nontrivial Hedging Portfolio for Option Pricing with Transaction Costs. Ann. Appl. Probab. 5 (1995), no. 2, 327--355. doi:10.1214/aoap/1177004767. http://projecteuclid.org/euclid.aoap/1177004767.