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On the Mean-Variance Tradeoff in Option Replication with Transactions Costs.
- Source :
- Journal of Financial & Quantitative Analysis; Jun96, Vol. 31 Issue 2, p233-263, 31p, 12 Graphs
- Publication Year :
- 1996
-
Abstract
- This paper analyzes the tradeoff between cost and risk of discretely rebalanced option hedges in the presence of transactions costs. I present closed form solutions for expected hedging error, transactions costs, and variance of the cash flow from a time-based hedging strategy similar to that analyzed by Leland (1985). Furthermore, I characterize the cost and risk of a move-based hedging strategy without resorting to Monte Carlo simulations. All results are sufficiently general to accommodate the use of a transactions costs adjusted hedging volatility and an asset rate of return that differs from the risk-free rate of return. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 00221090
- Volume :
- 31
- Issue :
- 2
- Database :
- Complementary Index
- Journal :
- Journal of Financial & Quantitative Analysis
- Publication Type :
- Academic Journal
- Accession number :
- 9607112572
- Full Text :
- https://doi.org/10.2307/2331181