Swing Options

Carmona, René; Ludkovski, Michael

doi:10.1002/9780470061602.eqf17017

Cited by 4 publications

(6 citation statements)

References 22 publications

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“…Several papers dealt with the mathematical analysis of swing American options (see, for instance, [1], [2] and references therein), but none of these papers defined explicitly what is a perfect hedge and what is the option price. For instance, in [2], the authors studied an optimal multiple stopping problem for continuous time models but they did not explained why the value of the above problem under the martingale measure in a complete market is the option price.…”

Section: Introductionmentioning

confidence: 99%

“…Swing contracts emerging in energy and commodity markets are often modelled by multiple exercising of American style options which leads to multiple stopping problems (see [2], [1] and references there). Most closely such models describe options consisting of a package of claims or rights which can be exercised in a prescribed (or in any) order with some restrictions such as a delay time between successive exercises.…”

Section: Introductionmentioning

confidence: 99%

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Hedging of swing game options in continuous time

Iron

Kifer

2011

Stochastics

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This paper introduces and studies hedging for game (Israeli) style extension of swing options in continuous time considered as multiple exercise derivatives of a base security, evolving according to the geometric Brownian motion. Assuming that the underlying security can be traded without restrictions, we derive a formula for the valuation of multiple exercise options via classical hedging arguments. This paper extends to the continuous time case the discrete time valuation results which requires substantial additional machinery such as, for instance, regularity results for value processes of Dynkin's games and the study of multiple stopping Dynkin's games. Earlier papers on valuation of multiple exercise American options viewed it only as a multiple stopping problem.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Hedging of swing game options in continuous time

Iron

Kifer

2011

Stochastics

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“…As indicated in Carmona and Ludkovski (2009), the first discussions about swing options appeared in energy magazines (Barbieri and Garman 1996), while the first rigorous treatment of this topic was in Jaillet et al (2004). The formulation of swing option prices in terms of multiple optimal stopping times represents a relevant step developed in Carmona and Touzi (2008), who related swing and American options.…”

Section: Introductionmentioning

confidence: 99%

Pricing swing options in electricity markets with two stochastic factors using a partial differential equation approach

Calvo-Garrido¹,

Ehrhardt²,

Vázquez³

2016

JCF

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In this paper, we consider the numerical valuation of swing options in electricity markets based on a two-factor model. These kinds of contracts are modeled as pathdependent options with multiple exercise rights. From a mathematical point of view, the valuation of these products is posed as a sequence of free boundary problems, where two exercise rights are separated by a time period. In order to solve the pricing problem, we propose appropriate numerical methods based on a Crank-Nicolson semi-Lagrangian method combined with biquadratic Lagrange finite elements for the discretization of the partial differential equation. In addition, we use an augmented Lagrangian active set method to cope with the early exercise feature when it appears. Moreover, we derive appropriate artificial boundary conditions to treat the unbounded domain numerically. Finally, we present some numerical results to illustrate the proper behavior of the numerical schemes.

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“…There are typically local constraints on how much volume can be exercised at a given time, and global constraints on the total volume. Swing options are particularly popular in electricity markets, and can be used to hedge against the risk of fluctuating demand, see Carmona and Ludkovski (2010).…”

Section: Introductionmentioning

confidence: 99%

A First‐order Bspde for Swing Option Pricing

Bender

Dokuchaev

2014

Mathematical Finance

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We study an optimal control problem related to swing option pricing in a general nonMarkovian setting in continuous time. As a main result we uniquely characterize the value process in terms of a first-order nonlinear backward stochastic partial differential equation and a differential inclusion. Based on this result we also determine the set of optimal controls and derive a dual minimization problem.

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Swing Options

Abstract: Swing options are the main type of volumetric contracts in commodity markets. A swing contract gives the holder the right (but not the obligation) to adjust volume of received commodity at his or her discretion.

Cited by 4 publications

References 22 publications

Hedging of swing game options in continuous time

Hedging of swing game options in continuous time

Pricing swing options in electricity markets with two stochastic factors using a partial differential equation approach

A First‐order Bspde for Swing Option Pricing

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