An exploration into the impact of transaction costs and market frictions on the pricing models of options and how these impact risk management and hedging strategies

Transaction costs and market frictions can be incorporated into traditional calculus-based option pricing models by adjusting the underlying assumptions of frictionless markets. This integration often leads to modified pricing formulas and hedging strategies, reflecting more realistic scenarios where perfect arbitrage is impossible, ultimately resulting in higher option prices and more complex hedging strategies to manage the additional costs.