Alet Roux

Options Under Transaction Costs: Algorithms for Pricing and Hedging Ofeuropean and American Options Under Proportionaltransaction Costs and Different Borrowing and Lending Rates Alet Roux

This book is aimed at researchers and PhD students in mathematical finance. It studies the pricing and hedging of options in financial markets withproportional transaction costs on trading in shares,modeled as bid-ask spreads, and different interestrates for borrowing and lending of cash. This is done by means of fair pricing and super-hedging. The fair price of an option is any market price for it that does not allow traders to make profit with no risk, and a super-hedging strategy allows the seller and buyer to remain in a solvent position after respectively delivering and receiving the option payoff. Efficient algorithms are presented for computing the bid and ask prices of European and American options; these prices serve as bounds on the fair prices. This unifies all existing algorithms for the calculation of such prices. As a by-product, a straightforward iterative method is found for determining the optimal super-hedging strategies (and stopping times) for both the buyer and seller of an option, and also optimal stopping strategies in the case of American options.