Working Paper Series in Economics, Karlsruher Institut für Technologie (KIT) 56
In this paper we study a hedging problem for European options taking into account the presence of transaction costs. In incomplete markets, i.e. markets without classical restriction, there exists a unique martingale measure. Our approach is based on the Föllmer-Schweizer-Sondermann concept of risk minimizing. In discret time Markov market model we construct a risk minimizing strategy by backwards iteration. The strategy gives a closed-form formula. A continuous time market model using martingale price process shows the existence of a risk minimizing hedging strategy.