Super-replication of European Options with Convex Payoff under Proportional Transaction Costs
DOI:
https://doi.org/10.15678/ZNUEK.2017.0970.1007Keywords:
super-replication, transaction costs, model uncertainty, European optionsAbstract
The paper examines the super-replication of contingent claims in a discrete time financial market with proportional transaction costs. The sole assumption on stock price dynamics is that the returns are bounded. The class of path-dependent European options with nonnegative convex payoff functions is considered. It is proved that the pricing of this type of options can be studied through the pricing of a suitable binomial model. As a consequence, it is shown that the pricing algorithm, which is essentially a dynamic programming procedure on a tree, can be used when the set of possible scenarios is not finite.
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References
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