ArticleOriginal scientific text
Title
Optimality of the replicating strategy for American options
Authors 1
Affiliations
- Department of Mathematical Statistics and Experimentation, Agricultural University, Rakowiecka 26/30, 02-568 Warszawa, Poland
Abstract
The aim of this paper is to study the problem of optimality of replicating strategies associated with pricing of American contingent claims in the Cox-Ross-Rubinstein model with proportional transaction costs. We show that a replication of the option is always possible. We give sufficient conditions for the existence of a replicating strategy which is optimal, and also show an example of an optimal replicating strategy that is not optimal in the global sense.
Keywords
Cox-Ross-Rubinstein model, replicating strategy, American option
Bibliography
- J. Cvitanić, H. Pham and N. Touzi, A closed-form solution to the problem of super-replication under transaction costs, Finance Stochastics 3 (1999), 35-54.
- S. Levental and A. V. Skorohod, On the possibility of hedging options in the presence of transaction costs, Ann. Appl. Probab. 7 (1997), 410-443.
- M. Musiela and M. Rutkowski, Martingale Methods in Financial Modelling, Springer, Berlin, 1997.
- M. Rutkowski, Optimality of replication in the CRR model with transaction costs, Appl. Math. (Warsaw) 25 (1998), 29-53.
- Ł. Stettner, Option pricing in the CRR model with proportional transaction costs: A cone transformation approach, ibid. 24 (1997), 475-514.
Pages:
93-105
Main language of publication
English
Received
1998-09-16
Published
1999
Exact and natural sciences