Whalley, A. Elizabeth. (2011) Optimal partial hedging of options with small transaction costs. Journal of Futures Markets, Vol.31 (No.9). pp. 855-897. ISSN 0270-7314

Full text not available from this repository.

Abstract

This study uses asymptotic analysis to derive optimal hedging strategies for option portfolios hedged using an imperfectly correlated hedging asset with small fixed and/or proportional transaction costs, obtaining explicit formulae in special cases. This is of use when it is impractical to hedge using the underlying asset itself. The hedging strategy holds a position in the hedging asset whose value lies between two bounds, which are independent of the hedging asset's current value. For low absolute correlation between hedging and hedged assets, highly risk-averse investors and large portfolios, hedging strategies and option values differ significantly from their perfect market equivalents.

Item Type:	Journal Article
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Options (Finance), Hedging (Finance), Transaction costs, Asymptotic distribution (Probability theory)
Journal or Publication Title:	Journal of Futures Markets
Publisher:	John Wiley & Sons Ltd.
ISSN:	0270-7314
Date:	September 2011
Volume:	Vol.31
Number:	No.9
Number of Pages:	43
Page Range:	pp. 855-897
Identification Number:	10.1002/fut.20498
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
References:	Andersen, E. D., & Damgaard, A. (1999). Utility based option pricing with proportional transaction costs and diversification problems: An interior point optimization approach. Applied Numerical Mathematics, 29, 395–422. Atkinson, C., & Wilmott, P. (1995). Portfolio management with transaction costs: An asymptotic analysis. Mathematical Finance, 5, 357–367. Barles, G., & Soner, H. M. (1998). Option pricing with transaction costs and a nonlinear Black-Scholes equation. Finance and Stochastics, 2, 369–397. Bliss, R., & Panigirtzoglou, N. (2004). Option-implied risk aversion estimates. Journal of Finance, 59, 407–446. Clewlow, L., & Hodges, S. D. (1997). Optimal delta-hedging under transaction costs. Journal of Economic Dynamics and Control, 21, 1353–1376. Damgaard, A. (2003). Utility based option evaluation with proportional transaction costs. Journal of Economic Dynamics and Control, 27, 667–700. Damgaard, A. (2006). Computation of reservation prices of options with proportional transaction costs. Journal of Economic Dynamics and Control, 30, 415–444. Davis, M. H. A., Panas, V. G., & Zariphopoulou, T. (1993). European option pricing with transaction costs. SIAM Journal of Control and Optimisation, 31, 470–493. Grannan, E. R., & Swindle, G. H. (1996). Minimizing transaction costs of option hedging strategies. Mathematical Finance, 6, 341–364. Henderson, V. (2005). The impact of the market portfolio on the valuation, incentives and optimality of Executive Stock Options. Quantitative Finance, 5, 1–13. Henrotte, P. (1993). Transaction costs and duplication strategies, Working paper, Stanford University and HEC. Ho, A. F. (2003) Optimal trading strategy for European options with transaction costs. Advances in Mathematics, 177, 1–65. Hodges, S. D., & Neuberger, A. (1989). Optimal replication of contingent claims under transaction costs. Review of Futures Markets, 8, 222–239. Hoggard, T., Whalley, A. E., & Wilmott, P. (1994). Hedging option portfolios in the presence of transaction costs. Advances in Futures and Options Research, 7, 21–36. Leland, H. (1985). Option pricing with transaction costs. Journal of Finance, 40, 1283–1301. Lo, A. W., Mamaysky, H., & Wang, J. (2004). Asset prices and trading volume under fixed transaction costs. Journal of Political Economy, 112, 1054–1090. Monoyios, M. (2004). Performance of utility-based strategies for hedging basis risk. Quantitative Finance, 4, 245–255. Musiela, M., & Zariphopoulou, T. (2004). An example of indifference prices under exponential preferences. Finance and Stochastics, 8, 229–239. Rogers, L. C. H. (2004). Why is the effect of proportional transaction costs O(d2/3)? in Mathematics of Finance, AMS Contemporary Mathematics Series 351, G., Yin & Q. Zhang (Eds.), 303–308. Subramanian, A. (2005). European option pricing with general transaction costs and short selling constraints. Stochastic Models, 17, 215–245. Whalley, A. E., & Wilmott, P. (1993). A comparison of hedging strategies. Proceedings, 7th European Conference on Mathematics in Industry, A. Fasano & M. Primicerio (Eds.), 427–434. Whalley, A. E., & Wilmott, P. (1997). An asymptotic analysis of the Davis, Panas & Zariphopoulou model for option pricing with transaction costs. Mathematical Finance, 7, 307–324. Whalley, A. E., & Wilmott, P. (1999). Optimal hedging of options with small but arbitrary transaction cost structure. European Journal of Applied Mathematics, 10, 117–139. Zakamouline, V. I. (2003). European option pricing and hedging with both fixed and proportional transaction costs, Working paper, November 21, 2003. Zakamouline, V. I. (2006). European option pricing and hedging with both fixed and proportional transaction costs. Journal of Economic Dynamics and Control, 30, 1–25.
URI:	http://wrap.warwick.ac.uk/id/eprint/38761

Data sourced from Thomson Reuters' Web of Knowledge

Request changes to a record

Actions (login required)

View Item