Option pricing and replication with transaction costs and dividends

@inproceedings{Perrakis1999OptionPA,
  title={Option pricing and replication with transaction costs and dividends},
  author={Stylianos Perrakis and Jean LEFOLL},
  year={1999}
}
This paper derives optimal perfect hedging portfolios in the presence of transaction costs within the binomial model of stock returns, for a market maker that establishes bid and ask prices for American call options on stocks paying dividends prior to expiration. It is shown that, while the option holder's optimal exercise policy at the ex-dividend date varies according to the stock price, there are intervals of values for such a price where the optimal policy would depend on the holder's… CONTINUE READING
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