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Controlled options: derivatives with added flexibility

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  • Nikolai Dokuchaev

Abstract

The paper introduces a limit version of multiple stopping options such that the holder selects dynamically a weight function that control the distribution of the payments (benefits) over time. In applications for commodities and energy trading, a control process can represent the quantity that can be purchased by a fixed price at current time. In another example, the control represents the weight of the integral in a modification of the Asian option. The pricing for these options requires to solve a stochastic control problem. Some existence results and pricing rules are obtained via modifications of parabolic Bellman equations.

Suggested Citation

  • Nikolai Dokuchaev, 2010. "Controlled options: derivatives with added flexibility," Papers 1012.1412, arXiv.org, revised Oct 2011.
    • Handle: RePEc:arx:papers:1012.1412
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    File URL: http://arxiv.org/pdf/1012.1412
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    References listed on IDEAS

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    1. Dai, Min & Kwok, Yue Kuen, 2008. "Optimal multiple stopping models of reload options and shout options," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2269-2290, July.
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    Cited by:

    1. Christian Bender & Nikolai Dokuchaev, 2013. "A First-Order BSPDE for Swing Option Pricing," Papers 1305.3988, arXiv.org.

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