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The Effects of Transaction Costs and Different Borrowing and Lending Rates on the Option Pricing Model: A Note
Author(s) -
GILSTER JOHN E.,
LEE WILLIAM
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb03905.x
Subject(s) - hedge , valuation of options , transaction cost , economics , offset (computer science) , variable pricing , black–scholes model , database transaction , financial economics , monetary economics , business , microeconomics , computer science , volatility (finance) , ecology , programming language , biology
This paper modifies the Black‐Scholes option pricing model to include the effects of transaction costs and different borrowing and lending rates. The paper demonstrates that these market imperfections tend to offset each other yielding a bounded range of prices for each option. The paper also shows that under some conditions the option pricing hedge may be society's lowest cost financial intermediary.