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\title{American Option Pricing with Transaction Costs} \author{Valeri
  Zakamouline} \date{April 29, 2003} \maketitle
\begin{abstract}
  In this paper we examine the problem of finding investors'
  reservation option prices and corresponding early exercise policies
  of American-style options in the market with proportional
  transaction costs. We present a model, where investors have a CARA
  utility and finite time horizons, and derive some properties of
  reservation option prices. We discuss the numerical algorithm and
  present the results of numerical computations for American put and
  call options. We examine the effects on the reservation option
  prices and the corresponding optimal exercise policies of varying
  the investor's ARA and the level of transaction costs. We carry out
  the detailed analysis of the early exercise policy and find that in
  the market with transaction costs the holder of an American-style
  option exercises this option earlier as compared to the case with no
  transaction costs.  This phenomenon concerns both put and call
  options written on a non-dividend paying stock. The higher level the
  transaction costs is, or the higher risk avers the option holder is,
  the earlier an American option is exercised.
\end{abstract}
\end{document}
