Competing Methods for Option Hedging in the Presence of Transaction Costs

2002 ◽  
Vol 9 (3) ◽  
pp. 26-38 ◽  
Author(s):  
Lionel Martellini ◽  
Philippe Priaulet
Keyword(s):  
Transaction Costs ◽  
Option Hedging

MINIMIZING TRANSACTION COSTS OF OPTION HEDGING STRATEGIES

1996 ◽  
Vol 6 (4) ◽  
pp. 341-364 ◽  
Author(s):  
E. R. Grannan ◽  
G. H. Swindle
Keyword(s):  
Transaction Costs ◽  
Option Hedging ◽  
Hedging Strategies

ON THE NUMERICAL ASPECTS OF OPTIMAL OPTION HEDGING WITH TRANSACTION COSTS

2017 ◽  
Vol 20 (01) ◽  
pp. 1750002
Author(s):  
NORMAN JOSEPHY ◽  
LUCIA KIMBALL ◽  
VICTORIA STEBLOVSKAYA
Keyword(s):  
Transaction Costs ◽  
Numerical Study ◽  
Market Model ◽  
Hedging Strategy ◽  
Market Data ◽  
Option Hedging ◽  
Black Scholes ◽  
Real Market ◽  
Delta Hedge ◽  
The Impact

We present a numerical study of non-self-financing hedging of European options under proportional transaction costs. We describe an algorithmic approach based on a discrete time financial market model that extends the classical binomial model. We review the analytical basis for our algorithm and present a variety of empirical results using real market data. The performance of the algorithm is evaluated by comparing to a Black–Scholes delta hedge with transaction costs incorporated. We also evaluate the impact of recalibrating the hedging strategy one or more times during the life of the option using the most recent market data. These results are compared to a recalibrated Black–Scholes delta hedge modified for transaction costs.

Option hedging theory under transaction costs

2009 ◽  
Vol 33 (12) ◽  
pp. 1945-1961 ◽  
Author(s):  
Tze Leung Lai ◽  
Tiong Wee Lim
Keyword(s):  
Transaction Costs ◽  
Option Hedging

THE BEST HEDGING STRATEGY IN THE PRESENCE OF TRANSACTION COSTS

2009 ◽  
Vol 12 (06) ◽  
pp. 833-860 ◽  
Author(s):  
VALERI ZAKAMOULINE
Keyword(s):  
Transaction Costs ◽  
Theoretical Work ◽  
Optimization Method ◽  
Call Option ◽  
Empirical Comparison ◽  
Hedging Strategy ◽  
Option Hedging ◽  
Hedging Strategies ◽  
Short Call ◽  
The Subject

Considerable theoretical work has been devoted to the problem of option pricing and hedging with transaction costs. A variety of methods have been suggested and are currently being used for dynamic hedging of options in the presence of transaction costs. However, very little was done on the subject of an empirical comparison of different methods for option hedging with transaction costs. In a few existing studies the different methods are compared by studying their empirical performances in hedging only a plain-vanilla short call option. The reader is tempted to assume that the ranking of the different methods for hedging any kind of option remains the same as that for a vanilla call. The main goal of this paper is to show that the ranking of the alternative hedging strategies depends crucially on the type of the option position being hedged and the risk preferences of the hedger. In addition, we present and implement a simple optimization method that, in some cases, improves considerably the performance of some hedging strategies.

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