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MODIFIED LELAND’S STRATEGY FOR A CONSTANT TRANSACTION COSTS RATE
Author(s) -
Lepinette Emmanuel
Publication year - 2012
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/j.1467-9965.2011.00498.x
Subject(s) - transaction cost , portfolio , volatility (finance) , economics , constant (computer programming) , terminal value , limit (mathematics) , infinity , value (mathematics) , econometrics , database transaction , zero (linguistics) , mathematics , mathematical economics , financial economics , microeconomics , computer science , statistics , mathematical analysis , net present value , linguistics , philosophy , production (economics) , programming language
In 1985 Leland suggested an approach to price contingent claims under proportional transaction costs. Its main idea is to use the classical Black–Scholes formula with a suitably adjusted volatility for a periodical revision of the portfolio whose terminal value approximates the pay‐off. Unfortunately, if the transaction costs rate does not depend on the number of revisions, the approximation error does not converge to zero as the frequency of revisions tends to infinity. In the present paper, we suggest a modification of Leland’s strategy ensuring that the approximation error vanishes in the limit.