Exponential Utility of Indifference Prices and Hedging Strategy with Transaction Costs

This article studies the indifference prices and hedging strategies in the presence of proportional transaction costs in the incomplete markets. By introducing a new probabilistic measure, the indifference price and the corresponding hedging strategy can be got in one period model. A probabilistic iterative algorithm is constructed for indifference prices of claims in a multiperiod incomplete model. And the corresponding pricing measure and the hedging strategy can be got. Pricing measure proves a martingale measure if the transaction cost is zero.