TL;DRAbstract
We have derived the Black–Scholes partial differential equation for simple option prices, we have discussed the general theory behind the diffusion equation and, in the last few chapters, we have generalised the Black–Scholes model to exotic options. We continue this generalisation with a model that incorporates the effects of transaction costs on a hedged portfolio. We describe the model only for vanilla options but it can easily be modified for exotic options.
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We have derived the Black–Scholes partial differential equation for simple option prices, we have discussed the general theory behind the diffusion equation and, in the last few chapters, we have generalised the Black–Scholes model to exotic options. We continue this generalisation with a model that incorporates the effects of transaction costs on a hedged portfolio. We describe the model only for vanilla options but it can easily be modified for exotic options.
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