Option Pricing Model with Transaction Costs

TL;DR

This paper introduces alternative option pricing models that incorporate various transaction cost structures, including an exponentially decreasing cost, to improve upon the classical Black-Scholes model.

Contribution

It proposes new option pricing models with different transaction cost structures, notably an exponential decrease, extending the classical framework.

Findings

New models account for transaction costs more realistically.

Exponential cost structure affects option prices significantly.

Models outperform classical Black-Scholes in cost-sensitive scenarios.

Abstract

The author presents alternatives to the Black-Scholes european call option pricing model by incorporating different transaction cost structures in the replicating strategy. In particular, an exponentially decreasing structure is proposed and developed.