Swing options in commodity markets: A multidimensional L\'evy diffusion model
AbstractWe study valuation of swing options on commodity markets when the commodity prices are driven by multiple factors. The factors are modeled as diffusion processes driven by a multidimensional L\'evy process. We set up a valuation model in terms of a dynamic programming problem where the option can be exercised continuously in time. Here, the number of swing rights is given by a total volume constraint. We analyze some general properties of the model and study the solution by analyzing the associated HJB-equation. Furthermore, we discuss the issues caused by the multi-dimensionality of the commodity price model. The results are illustrated numerically with three explicit examples.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1302.6399.
Date of creation: Feb 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-02 (All new papers)
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- Patrick Jaillet & Ehud I. Ronn & Stathis Tompaidis, 2004. "Valuation of Commodity-Based Swing Options," Management Science, INFORMS, vol. 50(7), pages 909-921, July.
- René Carmona & Nizar Touzi, 2008. "Optimal Multiple Stopping And Valuation Of Swing Options," Mathematical Finance, Wiley Blackwell, vol. 18(2), pages 239-268.
- Edoli, Enrico & Fiorenzani, Stefano & Ravelli, Samuele & Vargiolu, Tiziano, 2013. "Modeling and valuing make-up clauses in gas swing contracts," Energy Economics, Elsevier, vol. 35(C), pages 58-73.
- Mats Kjaer, 2008. "Pricing of Swing Options in a Mean Reverting Model with Jumps," Applied Mathematical Finance, Taylor & Francis Journals, vol. 15(5-6), pages 479-502.
- Ben Hambly & Sam Howison & Tino Kluge, 2009. "Modelling spikes and pricing swing options in electricity markets," Quantitative Finance, Taylor & Francis Journals, vol. 9(8), pages 937-949.
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