Expected vs. real transaction costs in European option pricing

Abstract

<p style='text-indent:20px;'>As an application and extension of some previous results contained in [<xref ref-type="bibr" rid="b1">1</xref>], we face up the problem of the option pricing in presence of transaction costs and hence in the framework of incomplete markets. The model proposed herein passes through defining properly the expected transaction costs, opposite to the real transaction costs in trading. The analysis is carried out both in the discrete and the continuous case and leads to suitable modifications of Cox-Ross-Rubinstein and Black-Scholes formulas. An application to a specific case referred to real market data at the end of the paper seems to validate our approach.</p>