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Sino-Russian Mathematics Center-JLU Colloquium(2023-026)—Option Pricing with Transaction Costs: Challenges and Approaches

Posted: 2023-11-08   Views: 

Title:Option Pricing with Transaction Costs: Challenges and Approaches

Reporter:Xiaoping Lu

Work Unit:University of Wollongong


Address:Lecture Hall 2, Main Building

Summary of the report:

In modern finance, mathematics assumes a pivotal role, particularly in option pricing. However, the consideration of transaction costs introduces a complexity that the conventional notion of a unique fair price between the option holder and writer, no longer exists. Both parties now seek to recover the costs incurred through trading the underlying stocks as part of their hedging strategy, thereby influencing the prices at which they are willing to transact for options. Mathematically, transaction costs make the pricing problem much more complicated, especially for American options. In this talk, some methods we used to price options in the presence of transaction costs will be presented, providing insights into how transaction costs impact option prices and optimal exercise policies for American options.


Introduction of the Reporter:

Dr. Xiaoping Lu is an Associate Professor in Applied Mathematics and the Director of the Centre for Financial Mathematics at the School of Mathematics and Applied Statistics, University of Wollongong, Australia. Holding a PhD from the University of Michigan, Ann Arbor, USA, Xiaoping’s research journey is marked by a diverse range of interests, with a recent emphasis on financial mathematics. Her recent works have revolved around the valuation of American options and a spectrum of financial derivatives, including Barrier option, convertible bonds, Foreign Exchange, Interest Rate Derivatives, Timer Options, Parisian Options, Stock Loans, and Weather Derivatives. In addition to her publications in top-ranked international journals, Xiaoping has co-edited a special issue on Financial Mathematics and Quantitative Finance for the ANZIAM Journal. She is also an editor at the International Journal of Mathematics for Industry.