VALUATION OF PATH-DEPENDENT CONTINGENT CLAIMS WITH MULTIPLE EXERCISE DECISIONS OVER TIME - THE CASE OF TAKE-OR-PAY

Hull and White (1993) introduced a method to extend lattice-based cont ingent claim valuation techniques to problems with path-dependent payo ffs. This paper builds upon their method in the process of valuing two types of commodity purchase contracts that exhibit a form of timing f lexibility not previously analyzed in the literature. The techniques d emonstrated take advantage of characteristics of claims that simplify incorporation of path dependencies. Possible uses for the methods demo nstrated include the valuation of: portfolios of mortgages, capital pr ojects where intensity of use affects productivity of the asset, and c apital projects with storage characteristics.