Dao Bai LIU
In this paper, a European-type contingent claim pricing problem with transaction costs is considered by a mean-variance hedging argument. The investor has to pay transaction costs which are proportional to the amount of stock transacted. The writer's hedging object is to minimize the hedging risk, defined as the variance of hedging error at expiration, with a proper expected excess return level. At first, we consider the mean-variance hedging problem: for initial hedging wealth f, maximizing the excess expected return under the minimum hedging risk level V0. On the other hand, we consider a mean-variance portfolio problem, which is to maximize the expected return with initial wealth 0 under the same risk level V0. The minimum initial hedging wealth f, which can offset the difference of the maximum expected return of these two problems, is the writer's price.
