Optimal Multiple Stopping and Valuation of Swing Options
affiliation not provided to SSRN
Université Paris-Dauphine - CEREMADE; Consultant Caisse Autonome de Refinancement (CDC group)
Mathematical Finance, Vol. 18, Issue 2, pp. 239-268, April 2008
The connection between optimal stopping of random systems and the theory of the Snell envelop is well understood, and its application to the pricing of American contingent claims is well known. Motivated by the pricing of swing contracts (whose recall components can be viewed as contingent claims with multiple exercises of American type) we investigate the mathematical generalization of these results to the case of possible multiple stopping. We prove existence of the multiple exercise policies in a fairly general set-up. We then concentrate on the Black-Scholes model for which we give a constructive solution in the perpetual case, and an approximation procedure in the finite horizon case. The last two sections of the paper are devoted to numerical results. We illustrate the theoretical results of the perpetual case, and in the finite horizon case, we introduce numerical approximation algorithms based on ideas of the Malliavin calculus.
Number of Pages in PDF File: 30Accepted Paper Series
Date posted: March 12, 2008
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.579 seconds