Optimal Redeeming Strategy of Stock Loans

TL;DR

This paper develops pricing models for stock loans considering different dividend distribution methods, analyzes the optimal redemption strategies, and provides numerical results despite the lack of closed-form formulas.

Contribution

It introduces new pricing models for stock loans under various dividend distributions and thoroughly analyzes the optimal redemption strategies without relying on closed-form solutions.

Findings

Dividend distribution significantly affects stock loan pricing.

Optimal redemption strategies vary with dividend policies.

Numerical methods effectively analyze strategies without closed-form formulas.

Abstract

A stock loan is a loan, secured by a stock, which gives the borrower the right to redeem the stock at any time before or on the loan maturity. The way of dividends distribution has a significant effect on the pricing of the stock loan and the optimal redeeming strategy adopted by the borrower. We present the pricing models sub ject to various ways of dividend distribution. Since closed-form price formulas are generally not available, we provide a thorough analysis to examine the optimal redeeming strategy. Numerical results are presented as well.