Analytic formula for option margin with liquidity costs under dynamic delta hedging

• Published in: Applied economics Vol. 53; no. 29; pp. 3391 - 3407
• Main Authors: Lee, Kyungsub, Seo, Byoung Ki
• Format: Journal Article
• Language: English
• Published: London Routledge 21.06.2021; Taylor & Francis Ltd
• Subjects: delta hedging; Economic analysis; Economic theory; European option; limit order; Liquidity; Liquidity cost; Monte Carlo simulation; Multiplication; Prices; quadratic variation; Securities prices; Simulation; Stock prices; Europe

This study derives the expected liquidity cost when performing the delta hedging process of a European option. This cost is represented by an integration formula that includes European option prices and a certain function depending on the delta process. We first define a unit liquidity cost and then...