Pricing American contingent claims by stochastic linear programming

Abstract

We consider pricing of American contingent claims (ACC) as well as their special cases, in a multi-period, discrete time, discrete state space setting. Until now, determining the buyer's price for ACCs required solving an integer programme unlike European contingent claims for which solving a linear programme is sufficient. However, we show that a relaxation of the integer programming problem that is a linear programme, can be used to get the same lower bound for the price of the ACC.