An integer programming model for pricing American contingent claims under transaction costs
Author
Pınar, M. Ç.
Camcı, A.
Date
2012Source Title
Computational Economics
Print ISSN
0927-7099
Electronic ISSN
1572-9974
Volume
39
Issue
1
Pages
1 - 12
Language
English
Type
ArticleItem Usage Stats
153
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990
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Abstract
We study the problem of computing the lower hedging price of an American contingent claim in a finite-state discrete-time market setting under proportional transaction costs. We derive a new mixed-integer linear programming formulation for calculating the lower hedging price. The linear programming relaxation of the formulation is exact in frictionless markets. Our results imply that it might be optimal for the holder of several identical American claims to exercise portions of the portfolio at different time points in the presence of proportional transaction costs while this incentive disappears in their absence.
Keywords
American Contingent ClaimsDividends
Hedging
Incomplete Markets
Martingales
Mixed-integer Programming
Pricing
Transaction Costs