Search results for "Option price"
showing 2 items of 2 documents
On the Irrelevance of Expected Stock Returns in the Pricing of Options in the Binomial Model: A Pedagogical Note
2005
The option pricing theory is now either a standard or a main part of many financial courses on both intermediate and advanced levels. All the textbooks that include the option pricing theory present a detailed treatment of the binomial model. However, the binomial model, although quite simple and intuitive in appearance, is rather tricky when it comes to its practical implementations and applications. In fact, it is amazing that the students often get totally confused when it finally comes to the issue of the choice of the parameters of the binomial model. The reason for all this confusion lies in the fact that all the textbooks emphasize the irrelevance of the binomial option price from th…
Yet Another Note on the Leland's Option Hedging Strategy with Transaction Costs
2005
In a market with transaction costs the option hedging is costly. The idea presented by Leland (1985) was to include the expected transaction costs in the cost of a replicating portfolio. The resulting Leland's pricing and hedging method is an adjusted Black-Scholes method where one uses a modified volatility in the Black-Scholes formulas for the option price and delta. The Leland's method has been criticized on different grounds. Despite the critique, the risk-return tradeoff of the Leland's strategy is often better than that of the Black-Scholes strategy even in the case when a hedger starts with the same initial value of a replicating portfolio. This implies that the Leland's modification…