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A Note on the Boyle–Vorst Discrete‐Time Option Pricing Model with Transactions Costs
Author(s) -
Palmer Ken
Publication year - 2001
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/1467-9965.00120
Subject(s) - arbitrage , argument (complex analysis) , economics , position (finance) , replication (statistics) , valuation of options , mathematical economics , econometrics , microeconomics , financial economics , mathematics , finance , statistics , biochemistry , chemistry
Working in a binomial framework, Boyle and Vorst (1992) derived self‐financing strategies perfectly replicating the final payoffs to long positions in European call and put options, assuming proportional transactions costs on trades in the stocks. The initial cost of such a strategy yields, by an arbitrage argument, an upper bound for the option price. A lower bound for the option price is obtained by replicating a short position. However, for short positions, Boyle and Vorst had to impose three additional conditions. Our aim in this paper is to remove Boyle and Vorst's conditions for the replication of short calls and puts.