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When Are Swing Options Bang-Bang?

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  • 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)

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    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.

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    Bibliographic Info

    Article 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 ()
    Pages: 867-899

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    Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:06:p:867-899

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    Related research

    Keywords: Swing option; stochastic control; optimal quantization; energy;

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    Cited by:
    1. Christian Bender & Nikolai Dokuchaev, 2013. "A First-Order BSPDE for Swing Option Pricing," Science & Finance (CFM) working paper archive 1305.3988, Science & Finance, Capital Fund Management.

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