Presentation of Degree Project E
- Lecturer: Jérémy Auffredic
- Contact person: Lauri Viitasaari
Title: Financial Models with Transaction Costs
The Black–Scholes model is a fairly simple model used to price European options by solving a linear partial differential equation. When transaction costs are considered, the Black–Scholes model fails due to unbounded transaction costs. The most famous alternative models to price options including transaction costs are the Leland model and its generalization, the Hoggard–Whalley–Wilmott model. The vast majority of the models with transaction costs lead to some nonlinear partial differential equations, where the nonlinear term incorporates the transaction costs. This thesis introduces to the reader the outline theory related to option pricing inclusive of transaction costs. This includes a review of the Black–Scholes model and its formula, subsequently follows by the presentation of the necessary change to be able to generalized the Black–Scholes equation under transaction costs. This thesis also considers the derivation of the previously mentioned models, further deepen by the investigation of some associated extensions such as cost structures, alternative models or ill-posedness.