Valuation of Commodity-Based Swing Options
AbstractIn the energy markets, in particular the electricity and natural gas markets, many contracts incorporate flexibility-of-delivery options known as "swing" or "take-or-pay" options. Subject to daily as well as periodic constraints, these contracts permit the option holder to repeatedly exercise the right to receive greater or smaller amounts of energy. We extract market information from forward prices and volatilities and build a pricing framework for swing options based on a one-factor mean-reverting stochastic process for energy prices that explicitly incorporates seasonal effects. We present a numerical scheme for the valuation of swing options calibrated for the case of natural gas.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 50 (2004)
Issue (Month): 7 (July)
energy prices; seasonality; one-factor model; numerical valuations; dynamic programming; binomial forest;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Marcus Eriksson & Jukka Lempa & Trygve Kastberg Nilssen, 2013. "Swing options in commodity markets: A multidimensional L\'evy diffusion model," Papers 1302.6399, arXiv.org.
- Cartea, Álvaro & Williams, Thomas, 2008.
"UK gas markets: The market price of risk and applications to multiple interruptible supply contracts,"
Elsevier, vol. 30(3), pages 829-846, May.
- Alvaro Cartea & Thomas Williams, 2006. "UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts," Birkbeck Working Papers in Economics and Finance 0608, Birkbeck, Department of Economics, Mathematics & Statistics.
- Aleksandrov, Nikolay & Espinoza, Raphael & Gyurkó, Lajos, 2013.
"Optimal oil production and the world supply of oil,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 37(7), pages 1248-1263.
- Nikolay Aleksandrov & Raphael Espinoza & Lajos Gyurko, 2012. "Optimal Oil Production and the World Supply of Oil," OxCarre Working Papers 092, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
- Nikolay Aleksandrov & lajos Gyurko & Raphael A. Espinoza, 2012. "Optimal Oil Production and the World Supply of Oil," IMF Working Papers 12/294, International Monetary Fund.
- Rodrigo S. Targino & Gareth W. Peters & Georgy Sofronov & Pavel V. Shevchenko, 2013. "Optimal insurance purchase strategies via optimal multiple stopping times," Papers 1312.0424, arXiv.org.
- García de la Vega, Victor Manuel & Ruiz-Porras, Antonio, 2009.
"Modelos estocásticos para el precio spot y del futuro de commodities con alta volatilidad y reversión a la media
[Stochastic models for the spot and future prices of commodities with high volatil," MPRA Paper 23177, University Library of Munich, Germany.
- García de la Vega, Víctor Manuel & Ruiz Porras, Antonio, 2009. "Modelos Estocásticos para el Precio Spot y del Futuro de Commodities con Alta Volatilidad y Reversión a la Media," Revista de Administración, Finanzas y Economía (Journal of Management, Finance and Economics), Tecnológico de Monterrey, Campus Ciudad de México, vol. 3(2), pages 1-24.
- Christian Bender & Nikolai Dokuchaev, 2013. "A First-Order BSPDE for Swing Option Pricing," Papers 1305.3988, arXiv.org.
- Felix, Bastian Joachim & Weber, Christoph, 2012. "Gas storage valuation applying numerically constructed recombining trees," European Journal of Operational Research, Elsevier, vol. 216(1), pages 178-187.
- John Schoenmakers, 2012. "A pure martingale dual for multiple stopping," Finance and Stochastics, Springer, vol. 16(2), pages 319-334, April.
- Kourouvakalis, Stylianos, 2008. "Méthodes numériques pour la valorisation d'options swings et autres problèmes sur les matières premières," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/116 edited by Geman, Hélyette, December.
- Álvaro Cartea & Carlos González-Pedraz, 2010.
"How much should we pay for interconnecting electricity markets? A real options approach,"
Business Economics Working Papers
wb103206, Universidad Carlos III, Departamento de Economía de la Empresa.
- Cartea, Álvaro & González-Pedraz, Carlos, 2012. "How much should we pay for interconnecting electricity markets? A real options approach," Energy Economics, Elsevier, vol. 34(1), pages 14-30.
- S\"oren Christensen & Albrecht Irle & Stephan J\"urgens, 2012. "Optimal multiple stopping with random waiting times," Papers 1205.1966, arXiv.org.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.