We consider conditional-mean hedging in a fractional Black-Scholes pricing model in the presence of proportional transaction costs. We develop an explicit formula for the conditional-mean hedging portfolio in terms of the recently discovered explicit conditional law of the fractional Brownian motion.
An investor with constant absolute risk aversion trades a risky asset with general It^o-dynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the associated w
elfare, expressed in terms of the local dynamics of the frictionless optimizer. By applying these results in the presence of a random endowment, we obtain asymptotic formulas for utility indifference prices and hedging strategies in the presence of small transaction costs.
We study superhedging of contingent claims with physical delivery in a discrete-time market model with convex transaction costs. Our model extends Kabanovs currency market model by allowing for nonlinear illiquidity effects. We show that an appropria
te generalization of Schachermayers robust no arbitrage condition implies that the set of claims hedgeable with zero cost is closed in probability. Combined with classical techniques of convex analysis, the closedness yields a dual characterization of premium processes that are sufficient to superhedge a given claim process. We also extend the fundamental theorem of asset pricing for general conical models.
This paper deals with the problem of discrete-time option pricing by the mixed fractional version of Merton model with transaction costs. By a mean-self-financing delta hedging argument in a discrete-time setting, a European call option pricing formu
la is obtained. We also investigate the effect of the time-step $delta t$ and the Hurst parameter $H$ on our pricing option model, which reveals that these parameters have high impact on option pricing. The properties of this model are also explained.
Valuing Guaranteed Minimum Withdrawal Benefit (GMWB) has attracted significant attention from both the academic field and real world financial markets. As remarked by Yang and Dai, the Black and Scholes framework seems to be inappropriate for such a
long maturity products. Also Chen Vetzal and Forsyth in showed that the price of these products is very sensitive to interest rate and volatility parameters. We propose here to use a stochastic volatility model (Heston model) and a Black Scholes model with stochastic interest rate (Hull White model). For this purpose we present four numerical methods for pricing GMWB variables annuities: a hybrid tree-finite difference method and a Hybrid Monte Carlo method, an ADI finite difference scheme, and a Standard Monte Carlo method. These methods are used to determine the no-arbitrage fee for the most popul
A new framework for pricing the European currency option is developed in the case where the spot exchange rate fellows a time-changed fractional Brownian motion. An analytic formula for pricing European foreign currency option is proposed by a mean s
elf-financing delta-hedging argument in a discrete time setting. The minimal price of a currency option under transaction costs is obtained as time-step $Delta t=left(frac{t^{beta-1}}{Gamma(beta)}right)^{-1}left(frac{2}{pi}right)^{frac{1}{2H}}left(frac{alpha}{sigma}right)^{frac{1}{H}}$ , which can be used as the actual price of an option. In addition, we also show that time-step and long-range dependence have a significant impact on option pricing.