Optimal redeeming strategy of stock loans with finite maturity

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 stock loans and the optimal redeeming strategy adopted by the borrower. We present the pricing models of the finite maturity stock loans subject to various ways of dividend distribution. Because 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. © 2010 Wiley Periodicals, Inc.