In this paper, we investigate an optimal stopping problem (mixed with stochastic controls) for a manager whose utility is nonsmooth and nonconcave over a finite time horizon. The paper aims to develop a new methodology, which is significantly different from those of mixed dynamic optimal control and stopping problems in the existing literature, so as to figure out the manager's best strategies. The problem is first reformulated into a free boundary problem with a fully nonlinear operator. Then, by means of a dual transformation, it is further converted into a free boundary problem with a linear operator, which can be consequently tackled by the classical method. Finally, using the inverse transformation, we obtain the properties of the optimal trading strategy and the optimal stopping time for the original problem.

Focusing on the problem arising from a stochastic model of risk control and dividend optimization techniques for a financial corporation, this work considers a parabolic variational inequality with gradient constraint min vt − max 0≤a≤1 1 2 σ 2 a 2 vxx + µavx + cv, vx − 1 = 0. Suppose the company's performance index is the total discounted expected dividends, our objective is to choose a pair of control variables so as to maximize the company's performance index, which is the solution to the above variational inequality under certain initial-boundary conditions. The main effort is to analyse the properties of the solution and two free boundaries arising from the above variational inequality, which we call dividend boundary and reinsurance boundary.

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