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Thread Subject:
european call duplication with transaction cost

Subject: european call duplication with transaction cost

From: S?bastien Vilaseca

Date: 13 Feb, 2009 09:04:01

Message: 1 of 1

Hi,
I have would like to add transaction cost (fixed and proportional) into my duplication strategy (daily rebalancing, delta neutral). Do you think this code is correct?

%Proportional transaction cost
ptc=0.0025;
%Fixed transaction cost
ftc=1/4;
%Construction of initial portfolio
RiskFreeAsset(1)=1;
call(:,1)=blsprice(S(:,1),K,r,T,sigma);
delta(:,1)=blsdelta(S(:,1),K,r,T,sigma);
beta(:,1)=call(:,1)-(delta(:,1).*S(:,1)*(1+ptc))+ftc;
%Initial portfolio value
ptf1(:,1)=delta(:,1).*S(:,1)+beta(:,1)*RiskFreeAsset(1);

%Evolution of the portfolio with daily rebalancing:
for k=2:NIncr
RiskFreeAsset(k)=RiskFreeAsset(1)*(exp(r*1/365)^k);
call(:,k)=blsprice(S(:,k),K,r,T,sigma);
delta(:,k)=blsdelta(S(:,k),K,r,T,sigma);
beta(:,k)=(call(:,k)-(delta(:,k).*S(:,k)*(1+ptc)+ftc))./RiskFreeAsset(k);
ptf1(:,k)=delta(:,k).*S(:,k)+beta(:,k)*RiskFreeAsset(k);
end
 
I mean, when we include transaction cost into the portfolio, the calculation of the delta doesn't change. What does change is the amount of borrowing, because when we need to buy (sell) more stocks, it costs more(less) than without transaction costs.
Thank you very much for your help.

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