Pricing Multiple Interruptible-Swing Contracts

Marcelo Figueroa

No 606, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

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.

Keywords: Energy derivatives; electricity market; Least-Squares Monte Carlo; swing options. (search for similar items in EconPapers)
Date: 2006-06
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https://eprints.bbk.ac.uk/id/eprint/26940 First version, 2006 (application/pdf)

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