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Pricing Multiple Interruptible-Swing Contracts

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Author Info
Marcelo G. Figueroa (Department of Economics, Mathematics & Statistics, Birkbeck)

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Abstract

In this article we price a multiple-interruptible contract for the electricity market in England and Wales under a mean-reverting jump-diffusion model with seasonality. We do so by combining forward contracts with a swing option which can be exercised a pre-specified number of times. We price this swing option by means of an extension of the Least-Squares Monte Carlo methodology for American options. We additionally compute the lower and upper bounds for this contract. For the computation of the lower bound we provide a semi-analytical formula which reduces greatly the required computational time.

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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0606.pdf
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File Function: First version, 2006
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Publisher Info
Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0606.

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Date of creation: Jun 2006
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Handle: RePEc:bbk:bbkefp:0606

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Related research
Keywords: Energy derivatives; electricity market; Least-Squares Monte Carlo; swing options.;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Álvaro Cartea & Marcelo Figueroa, 2005. "Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality," Applied Mathematical Finance, Taylor and Francis Journals, vol. 12(4), pages 313-335, December. [Downloadable!] (restricted)
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  2. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(1), pages 113-47.
  3. Hélyette Geman & Andrea Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," Journal of Business, University of Chicago Press, vol. 79(3), pages 1225-1262, May. [Downloadable!]
  4. Alfredo Ibáñez, 2004. "Valuation by Simulation of Contingent Claims with Multiple Early Exercise Opportunities," Mathematical Finance, Blackwell Publishing, vol. 14(2), pages 223-248. [Downloadable!] (restricted)
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  5. Ib??ez, Alfredo & Zapatero, Fernando, 2004. "Monte Carlo Valuation of American Options through Computation of the Optimal Exercise Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 253-275, June. [Downloadable!]
  6. Álvaro Escribano & Juan Ignacio Peña & Pablo Villaplana, 2002. "Modeling Electricity Prices: International Evidence," Economics Working Papers we022708, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  7. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July. [Downloadable!] (restricted)
  8. Alan L. Lewis, 2001. "A Simple Option Formula for General Jump-Diffusion and other Exponential Levy Processes," Related articles explevy, Finance Press. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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