The Chooser Options Pricing Based On Transaction Cost And Dividend

In recent decades, with the improvement and maturation of the modern financial theory and continuous development of the financial market, a large variety of financial derivatives have been designed, which have a significant influence on global economy. Options, especially, the most active one in the financial derivative market, have a rapid development and wide application since the nineties. This is because it has the excellent functions of risk averse, risk investment and value identification, and the characteristics of flexibility and diversity.We know that the Black-Scholes option pricing model is built on the assumption that underlying assets move without dividend and transaction cost. However, dividends are paid generally and transaction fee is charged for every transaction in the financial market. This resulted in discrepancy between the solution of the basic Black-Scholes model and the actual option prices from market. To overcome this problem, this article extends the assumptions of the Black-Scholes option pricing model. We add the dividend payment and transaction cost charged by fixed proportion in the assumption, make the model more practical. The theory of stochastic process and partial differential equation has been used to obtain European option pricing formula with the transaction cost and dividend. Further, we discuss call options, put options and the chooser option pricing models with the same expiry date and strike price.