A dual approach to multiple exercise option problems under constraints

A dual approach to multiple exercise option problems under constraints

0.00 Avg rating0 Votes
Article ID: iaor20105143
Volume: 71
Issue: 3
Start Page Number: 503
End Page Number: 533
Publication Date: Jun 2010
Journal: Mathematical Methods of Operations Research
Authors: ,
Keywords: option pricing
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.

Reviews

Required fields are marked *. Your email address will not be published.