An Integer Programming Model for
Pricing American Contingent Claims under Proportional Transaction Costs
Authors: Ahmet Camci and M.C. Pinar
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. In a frictionless market the linear programming relaxation is exact.
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 claim, transaction costs, mixed-integer programming, linear programming,
martingales, pricing, hedging, dividends