Pricing Multiple Exercise American Options by Linear Programming

Monia Giandomenico () and Mustafa Ç. Pınar ()
Additional contact information
Monia Giandomenico: University of L’Aquila
Mustafa Ç. Pınar: Bilkent University

Chapter Chapter 6 in Optimal Financial Decision Making under Uncertainty, 2017, pp 137-150 from Springer

Abstract: Abstract We consider the problem of computing the lower hedging price of American options of the call and put type written on a non-dividend paying stock in a non-recombinant tree model with multiple exercise rights. We prove using a simple argument that an optimal exercise policy for an option with h exercise rights is to delay exercise until the last h periods. The result implies that the mixed-integer programming model for computing the lower hedging price and the optimal exercise and hedging policy has a linear programming relaxation that is exact, i.e., the relaxation admits an optimal solution where all variables required to be integral have integer values.

Keywords: American options; Swing options; Multiple exercise rights; Linear programming; Mixed-integer programming; Lower hedging price (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:isochp:978-3-319-41613-7_6

Ordering information: This item can be ordered from
http://www.springer.com/9783319416137

DOI: 10.1007/978-3-319-41613-7_6

Access Statistics for this chapter

More chapters in International Series in Operations Research & Management Science from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().