Operating a swing option on today's gas markets: How least squares Monte Carlo works and why it is beneficial

Marc Hanfeld and Stephan Schlüter

No 10/2016, FAU Discussion Papers in Economics from Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics

Abstract: We investigate, if it pays off for a company to invest into complex swing option algorithms. We first introduce least squares Monte Carlo as a complex valuation algorithm and explain in detail how it works. Using a simulation study and two backtest scenarios we compare the output of this method with a simple myopic approach, and evaluate the results also from a business point of view. We find that myopic operation performs fairly well, but given a certain contract size and a certain contract flexibility, LSMC clearly prevails.

Keywords: Swing Option; Spot Optimization; Least Squares Monte Carlo (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cmp
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwqwdp:102016

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