The Extended Black-Scholes Model with-LAGS-and “Hedging Errorsâ€
Abstract
The Black-Scholes model is derived under the assumption that heding is done instantaneously. In practice, there is a “small†time that elapses between buying or selling the option and hedging using the underlying asset. Under the following assumptions used in the standard Black-Scholes analysis, the value of the option will depend only on the price of the underlying asset S, time t and on other Variables assumed constants. These assumptions or “ideal conditions†as expressed by Black-Scholes are the following.- The option us European,
- The short term interest rate is known,
- The underlying asset follows a random walk with a variance rate proportional to the stock price. It pays no dividends or other distributions.
- There is no transaction costs and short selling is allowed, i.e. an investment can sell a security that he does not own.
- Trading takes place continuously and the standard form of the capital market model holds at each instant.
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Published
19-08-2003
How to Cite
Bellalah, M. (2003). The Extended Black-Scholes Model with-LAGS-and “Hedging Errorsâ€. International Journal of Banking and Finance, 1(2), 111–119. Retrieved from https://e-journal.uum.edu.my/index.php/ijbf/article/view/8337
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