Scaling and long-range dependence in option pricing V: Multiscaling hedging and implied volatility smiles under the fractional Black-Scholes model with transaction costs

This paper deals with the problem of discrete time option pricing using the fractional Black-Scholes model with transaction costs. Through the ‘anchoring and adjustment’ argument in a discrete time setting, a European call option pricing formula is obtained. The minimal price of an option under transaction costs is obtained. In addition, the relation between scaling and implied volatility smiles is discussed.