The Effects of Transaction Costs and Different Borrowing and Lending Rates on the Option Pricing Model: A Note

  • Author(s): JOHN E. GILSTER, WILLIAM LEE
  • Published: Apr 30, 2012
  • Pages: 1215-1221
  • DOI: 10.1111/j.1540-6261.1984.tb03905.x

ABSTRACT

This paper modifies the Black‐Scholes option pricing model to include the effects of transaction costs and different borrowing and lending rates. The paper demonstrates that these market imperfections tend to offset each other yielding a bounded range of prices for each option. The paper also shows that under some conditions the option pricing hedge may be society's lowest cost financial intermediary.

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