DISCRETE HEDGING WITH LIQUIDITY RISK

  • Tran Minh, Ho Quyen, Duong Thanh

Abstract

In this paper, we study European options with Black-Scholes model in a market with liquidity costs. We prove that delta hedging is still an optimal strategy. The option price in the presence of liquidity costs is given by solving a partial differential equation. Then, the applied implicit finite difference method is showed to be stable. Finally, some experiments illustrate the efficiency of our method.

Published
2019-07-15