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Valuation of Path-Dependent Contingent Claims with Multiple Exercise Decisions over Time: The Case of Take-or-Pay

Published online by Cambridge University Press:  06 April 2009

Andrew C. Thompson
Andrew C. Thompson
Affiliation:
Department of Finance, College of Business Administration, University of Houston, Houston, TX 77204–6282.
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Abstract

Hull and White (1993) introduced a method to extend lattice-based contingent claim valuation techniques to problems with path-dependent payoffs. This paper builds upon their method in the process of valuing two types of commodity purchase contracts that exhibit a form of timing flexibility not previously analyzed in the literature. The techniques demonstrated take advantage of characteristics of claims that simplify incorporation of path dependencies. Possible uses for the methods demonstrated include the valuation of: portfolios of mortgages, capital projects where intensity of use affects productivity of the asset, and capital projects with storage characteristics.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 2 , June 1995 , pp. 271 - 293
Copyright
Copyright © School of Business Administration, University of Washington 1995

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