A dual approach to multiple exercise option problems under constraints

N. Aleksandrov () and B. Hambly ()

Mathematical Methods of Operations Research, 2010, vol. 71, issue 3, 503-533

Abstract: This paper considers the pricing of multiple exercise options in discrete time. This type of option can be exercised up to a finite number of times over the lifetime of the contract. We allow multiple exercise of the option at each time point up to a constraint, a feature relevant for pricing swing options in energy markets. It is shown that, in the case where an option can be exercised an equal number of times at each time point, the problem can be reduced to the case of a single exercise possibility at each time. In the general case there is not a solution of this type. We develop a dual representation for the problem and give an algorithm for calculating both lower and upper bounds for the prices of such multiple exercise options. Copyright Springer-Verlag 2010

Keywords: Multiple optimal stopping; Dual approach; Multiple exercise options; Swing options; 60G40; 91B28; 90C39; 90C46 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s00186-010-0310-9

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