We begin with an overview of classical theories and empirical methods for option pricing and hedging without transaction costs, and then with a brief review of developments in the corresponding theory when there are transaction costs. An interesting feature of the optimal hedging strategy in the...

The problem of option hedging in the presence of proportional transaction costs can be formulated as a singular stochastic control problem. Hodges and Neuberger [1989. Optimal replication of contingent claims under transactions costs. Review of Futures Markets 8, 222-239] introduced an approach...