OPTIMAL REDEEMING STRATEGY OF STOCK LOANS WITH FINITE MATURITY

TLDR

A stock loan is a secured loan that allows the borrower to redeem the stock anytime before maturity, and dividend distribution methods significantly influence its pricing and the borrower’s optimal redeeming strategy. The study presents pricing models for stock loans under different dividend distribution schemes. The authors develop pricing models for stock loans under various dividend distribution methods and conduct a thorough analysis to determine the optimal redeeming strategy, given the lack of closed‑form formulas. Numerical results illustrate the impact of dividend distribution on stock loan pricing and the optimal redeeming strategy.

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.