Universal Contingent Claims and Multiplicative Measures: Examples and Applications
by
Valery A. Kholodnyi
TXU Energy Trading

We present the concept of a universal contingent claim introduced earlier by the author. This concept provides a unified framework for the analysis of a wide class of financial derivatives.

A universal contingent claim describes the time evolution of a contingent payoff. In the simplest case of a European option this time evolution is given by a family of nonnegative linear operators, the valuation operators. For more complex contingent claims, this time evolution, given by the valuation operators, can be interrupted by discrete or continuous activation of external influences that are described by, generally speaking, nonlinear operators, the activation operators. For example, Bermudan and American options represent discreetly and continuously activated universal contingent claims with the activation operators being the nonlinear maximum operators.

We show that the value of a universal contingent claim is given by a multiplicative measure introduced earlier by the author. Roughly speaking, a multiplicative measure is an operator-valued function (in general, an abstract measure with values in an arbitrary partial monoid) on a semiring of sets which is multiplicative on the union of disjoint sets. We also show that the value of a continuously activated universal contingent claim is determined by a semilinear evolution equation.

Date received: February 1, 2002

Copyright © 2002 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Conferences Inc. Document # cago-31.