BibTex format
@article{atkinson:2011,
author = {atkinson, C and Ingpochai, P},
journal = {Applied Mathematical Finance},
title = {The Effect of Correlation andTransaction Costs on the Pricing ofBasket Options},
year = {2011}
}
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Citation
RIS format (EndNote, RefMan)
TY - JOUR
AB - ABSTRACT In this article, we examine the problem of evaluating the option price of a Europeancall option written on N underlying assets when there are proportional transaction costs in the market.Since the portfolio under consideration consists of multiple risky assets, which makes numericalmethods formidable, we use perturbation analyses. The article extends the model for option pricingon uncorrelated assets, which was proposed by Atkinson and Alexandropoulos (2006; Pricing aEuropean basket option in the presence of proportional transaction cost, Applied MathematicalFinance, 13(3), pp. 191–214). We determine optimal hedging strategies as well as option priceson both correlated and uncorrelated assets. The option valuation problem is obtained by comparingthe maximized utility of wealth with and without option liability. The two stochastic controlproblems, which arise from the transaction costs, are transformed to free boundary and partial differentialequation problems. Once the problems have been formulated, we establish optimal tradingstrategies for each of the portfolios. In addition, the optimal hedging strategies can be found bycomparing the trading strategies of the two portfolios. We provide a general procedure for solvingN risky assets, which shows that for ‘small’ correlations the N asset problem can be replacedby N (N − 1)/2 two-dimensional problems and give numerical examples for the two risky assetsportfolios.
AU - atkinson,C
AU - Ingpochai,P
PY - 2011///
TI - The Effect of Correlation andTransaction Costs on the Pricing ofBasket Options
T2 - Applied Mathematical Finance
ER -