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A dual approach to multiple exercise option problems under constraints

A dual approach to multiple exercise option problems under constraints 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Mathematical Methods of Operations Research Springer Journals

A dual approach to multiple exercise option problems under constraints

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References (17)

Publisher
Springer Journals
Copyright
Copyright © 2010 by Springer-Verlag
Subject
Mathematics; Calculus of Variations and Optimal Control; Optimization; Operation Research/Decision Theory; Business and Management, general
ISSN
1432-2994
eISSN
1432-5217
DOI
10.1007/s00186-010-0310-9
Publisher site
See Article on Publisher Site

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.

Journal

Mathematical Methods of Operations ResearchSpringer Journals

Published: May 28, 2010

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