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When Are Swing Options Bang-Bang?

Author

Listed:
  • OLIVIER BARDOU

    (GDF SUEZ, Finance Division, 22 rue du Docteur Lancereaux, 75008 Paris, France)

  • SANDRINE BOUTHEMY

    (GDF SUEZ, CEEMS, 361 Avenue du Président Wilson — B.P. 33, 93211 Saint-Denis La Plaine cedex, France)

  • GILLES PAGÈS

    (Laboratoire de Probabilités et Modèles Aléatoires, UMR 7599, Université Pierre et Marie Curie, case 188, 4, pl. Jussieu, F-75252 Paris Cedex 5, France)

Abstract

In this paper we investigate a class of swing options with firm constraints in view of the modeling of supply agreements. We show, for a fully general payoff process, that the premium, solution to a stochastic control problem, is concave and piecewise affine as a function of the global constraints of the contract. The existence of bang-bang optimal controls is established for a set of constraints which generates by affinity the whole premium function. When the payoff process is driven by an underlying Markov process, we propose a quantization based recursive backward procedure to price these contracts. A priori error bounds are established, uniformly with respect to the global constraints.

Suggested Citation

  • Olivier Bardou & Sandrine Bouthemy & Gilles Pagès, 2010. "When Are Swing Options Bang-Bang?," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(06), pages 867-899.
    • Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:06:n:s0219024910006030
    DOI: 10.1142/S0219024910006030
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    Citations

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    Cited by:

    1. Hendrik Kohrs & Hermann Mühlichen & Benjamin R. Auer & Frank Schuhmacher, 2019. "Pricing and risk of swing contracts in natural gas markets," Review of Derivatives Research, Springer, vol. 22(1), pages 77-167, April.
    2. Xavier Warin, 2012. "Hedging Swing contract on gas markets," Papers 1208.5303, arXiv.org.
    3. Christian Yeo, 2023. "An analysis of least squares regression and neural networks approximation for the pricing of swing options," Papers 2307.04510, arXiv.org.
    4. J. Lars Kirkby & Shi-Jie Deng, 2019. "Swing Option Pricing By Dynamic Programming With B-Spline Density Projection," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(08), pages 1-53, December.

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