A Note on the Boyle-Vorst Discrete-Time Option Pricing Model with Transactions Costs

Author: Palmer, Ken

Source: Mathematical Finance, Volume 11, Number 3, July 2001 , pp. 357-363(7)

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Abstract:

Working in a binomial framework, Boyle and Vorst (1992) derived self-financing strategies perfectly replicating the final payoffs to long positions in European call and put options, assuming proportional transactions costs on trades in the stocks. The initial cost of such a strategy yields, by an arbitrage argument, an upper bound for the option price. A lower bound for the option price is obtained by replicating a short position. However, for short positions, Boyle and Vorst had to impose three additional conditions. Our aim in this paper is to remove Boyle and Vorst's conditions for the replication of short calls and puts.

Keywords: option pricing; discrete-time model; transactions costs; replication

Document Type: Research article

DOI: http://dx.doi.org/10.1111/1467-9965.00120

Affiliations: 1: Centre of Financial Studies, University of Melbourne, Victoria 3010, Australia

Publication date: 2001-07-01