Standard delta hedging fails to exactly replicate a European call option in the presence of transaction costs. We study a pricing and hedging model similar to the delta hedging strategy with an endogenous volatility parameter for the calculation of delta over time. The endogenous volatility...

This paper considers the problem of investment of capital in risky assets in a dynamic capital market in continuous time. The model controls risk, and in particular the risk associated with errors in the estimation of asset returns. The framework for investment risk is a geometric Brownian...

The formulation of dynamic stochastic programmes for financial applications generally requires the definition of a risk--reward objective function and a financial stochastic model to represent the uncertainty underlying the decision problem. The solution of the optimization problem and the...