Title: Pricing American Contingent Claims by Stochastic Linear Programming
Authors: Ahmet Camci and M.C. Pinar

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 program unlike European contingent claims for which solving a linear program is sufficient. However, we show that a relaxation of the integer programming problem that is a linear program, can be used to get the same lower bound for the price of the ACC. Keywords: American contingent claim, pricing, hedging, martingales, stochastic linear programming

To appear in Optimization.

Full paper available on request.