Mathematical Finance Seminar
April 25, 2002 5:30 PM to 7:00 PM
Roberto Baviera, MPS Finance Banca Mobiliare
Option Prices in Presence of Transaction Costs
We Provide closed formulas for European call option ask and bid prices
in presence of transaction costs.
Underlying prices have the same dynamics of Black-Scholes model and a
bid-ask spread proportional to bid price. We suppose that a market maker
has to quote a bid and ask price for an option in a perfect competition
market. Under these conditions derivate prices are obtained imposing the No
Almost Sure Arbitrage Principle: the market maker fixes bid (ask) price as
the highest buying (lowest selling) price that can be accepted by an
investor who maximizes the growth rate of his portfolio.