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.