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P. Boyle, David Emanuel (1980)
Discretely adjusted option hedgesJournal of Financial Economics, 8
M. Magill, G. Constantinides (1976)
Portfolio selection with transactions costsJournal of Economic Theory, 13
W. Feller (1959)
An Introduction to Probability Theory and Its Applications
M. Rubinstein. (1976)
The Valuation of Uncertain Income Streams and the Pricing of Options
J. Gilster, William Lee (1984)
The Effects of Transaction Costs and Different Borrowing and Lending Rates on the Option Pricing Model: A NoteJournal of Finance, 39
F. Black, Myron Scholes (1973)
The Pricing of Options and Corporate LiabilitiesJournal of Political Economy, 81
ABSTRACT Transactions costs invalidate the Black‐Scholes arbitrage argument for option pricing, since continuous revision implies infinite trading. Discrete revision using Black‐Scholes deltas generates errors which are correlated with the market, and do not approach zero with more frequent revision when transactions costs are included. This paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision. Hedging errors are uncorrelated with the market and approach zero with more frequent revision. The technique permits calculation of the transactions costs of option replication and provides bounds on option prices.
The Journal of Finance – Wiley
Published: Dec 1, 1985
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