Option Pricing In Binomial Market With Transaction Costs And Taxes

In1976, Cox, Ross and Rubinstein proposed the illustrious binomial model(the CRR model),considering option pricing without continuous sample path.In this method, we dividend the time until maturity of the option into n intervals, assuming that in each interval the price of the stock only have two outcome of rising or falling and the margin and the possibility of the rising or falling are same. Assuming no-arbitrage, we can price the option in the CRR model. When nâ†'∞, the limit of the pricing in the CRR model is the same to the pricing in the B-S model.At present, the CRR model has been widely used in the research of option pricing. But the transaction costs and taxes are not in the consideration of the model. In the paper, we add the transaction costs and taxes into the classic model and discuss the pricing of the European option under the consideration of different rates of credit and deposit. For the binomial market containing only stocks and bonds, presuming that the market is complete, we put forward a self-financing strategy replicating the given contingent claim and obtain the pricing of the European option with transaction costs and taxes under the hypothesis of no-arbitrage.