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Boyle, P. and Vorst, A. (1992). Option replication in discrete time with transaction costs. The Journal of Finance, 47(1):271-293.


  • Affiliated author
  • Publication year
    1992
  • Journal
    The Journal of Finance

Option replication is discussed in a discrete‐time framework with transaction costs. The model represents an extension of the Cox‐Ross‐Rubinstein binomial option pricing model to cover the case of proportional transaction costs. The method proceeds by constructing the appropriate replicating portfolio at each trading interval. Numerical values of these prices are presented for a range of parameter values. The paper derives a simple Black‐Scholes type approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values. 1992 The American Finance Association