  One of the shortcomings of the Black and Scholes model on option pricing is
the assumption that trading of the underlying asset does not affect the price
of that asset. This assumption can be fulfilled only in perfectly liquid
markets. Since most markets are illquid, this assumption might be too
restrictive. Thus, taking into account the price impact in option pricing is an
important issue. This issue has been dealt with, to some extent, for illiquid
markets by assuming a continuous process, mainly based on the Brownian motion.
However, the recent financial crisis and its effects on the global stock
markets have propagated the urgent need for more realistic models where the
stochastic process describing the price trajectories involves random jumps.
Nonetheless, works related to markets with jumps are scant compared to the
continuous ones. In addition, these previous studies do not deal with illiquid
markets. The contribution of this paper is to tackle the pricing problem for
options in illiquid markets with jumps as well as the hedging strategy within
this context, which is the first of its kind to the best knowledge.
