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Optimal investment and contingent claim valuation with exponential disutility under proportional transaction costs

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JournalInternational Journal of Theoretical and Applied Finance
DateAccepted/In press - 11 May 2022
DateE-pub ahead of print (current) - 12 Jul 2022
Number of pages41
Early online date12/07/22
Original languageEnglish

Abstract

We consider indifference pricing of contingent claims consisting of payment flows in a
discrete time model with proportional transaction costs and under exponential disutility.
This setting covers utility maximisation of terminal wealth as a special case. A dual
representation is obtained for the associated disutility minimisation problem, together
with a dynamic procedure for solving it. This leads to efficient and convergent numerical
procedures for indifference pricing, optimal trading strategies and shadow prices that
apply to a wide range of payoffs, a large range of time steps and all magnitudes of
transaction costs.

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