Past exam of the martingales and financial mathematics course of the University of Oxford / 2007 / B / 7 / d

At an entry date the holder chooses between entering the at-the-money call immediately and retaining the right to choose at the next date. The Snell envelope therefore gives, under risk-neutral valuation,with terminal value zero if entry has never occurred.

homogeneous function makes $B^{FSC}(T_i,s)=s{b}_i$. The discounted stock expected value is $s$, so the recursion reduces toIn the positive-rate case in the hint, put $\gamma =r/\sigma$ and $\beta =\sigma /2$. Then $c(u)$ is exactly its increasing function. The largest remaining maturity is $T-T_i$, so $b_i=c(T-T_i)$: immediate entry is optimal at every date while unentered.

At time zero this yieldsThus the Bermudan choice of start date adds no value over the ordinary at-the-money European call option in this setting. The maximum formula remains the general recursion; using monotonicity to select immediate entry uses the rate assumption supplied with the hint. This is immediate entry for a Bermudan forward-start call.