When Are Swing Options Bang-Bang?
AbstractIn 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.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 13 (2010)
Issue (Month): 06 ()
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Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml
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- Christian Bender & Nikolai Dokuchaev, 2013. "A First-Order BSPDE for Swing Option Pricing," Papers 1305.3988, arXiv.org.
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