Pricing multiple exercise American options by linear programming
Pınar, M. Ç.
International Series in Operations Research and Management Science
Springer New York LLC
137 - 150
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Please cite this item using this persistent URLhttp://hdl.handle.net/11693/38367
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 mixedinteger 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. © Springer International Publishing Switzerland 2017.