Valuation of Commodity-Based Swing Options

Valuation of Commodity-Based Swing Options

In the energy markets, in particular the electricity and natural gas markets, many contracts incorporate flexibility-of-delivery options, known as “swing” or “take-or-pay” options. Subject to daily as well as periodic constraints, these contracts permit the option holder to repeatedly exercise the right to receive greater or smaller amounts of energy. We extract market information from forward ...

Analogy based Valuation of Commodity Options

Approximate Recursive Valuation of Electricity Swing Options

Pricing options on electrical power is important because of the worldwide trend toward deregulated electricity markets. It is fascinating because of the exotic nature of most power derivatives and because of the many unique features of electricity markets. One of these unique features is that electrical power cannot, in appreciable quantities, be stored. While this plays havoc with arbitrage-fr...

Optimal Multiple Stopping and Valuation of Swing Options

The connection between optimal stopping of random systems and the theory of the Snell envelope is well understood, and its application to the pricing of American contingent claims is well known. Motivated by the pricing of swing contracts (whose recall components can be viewed as contingent claims with multiple exercises of American type) we investigate the mathematical generalization of these ...

Valuation of electricity swing options by multistage stochastic programming

Electricity swing options are Bermudan-style path-dependent derivatives on electrical energy. We consider an electricity market driven by several exogenous risk factors and formulate the pricing problem for a class of swing option contracts with energy and power limits as well as ramping constraints. Efficient numerical solution of the arising multistage stochastic program requires aggregation ...