Electricity swing option pricing by stochastic bilevel optimization: A survey and new approaches

Raimund Kovacevic () and Georg Ch. Pflug

European Journal of Operational Research, 2014, vol. 237, issue 2, 389-403

Abstract: We demonstrate how the problem of determining the ask price for electricity swing options can be considered as a stochastic bilevel program with asymmetric information. Unlike as for financial options, there is no way for basing the pricing method on no-arbitrage arguments. Two main situations are analyzed: if the seller has strong market power he/she might be able to maximize his/her utility, while in fully competitive situations he/she will just look for a price which makes profit and has acceptable risk. In both cases the seller has to consider the decision problem of a potential buyer – the valuation problem of determining a fair value for a specific option contract – and anticipate the buyer’s optimal reaction to any proposed strike price. We also discuss some methods for finding numerical solutions of stochastic bilevel problems with a special emphasis on using duality gap penalizations.

Keywords: Pricing; Swing option; Bilevel optimization; Stochastic optimization; Stackelberg game (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:237:y:2014:i:2:p:389-403

DOI: 10.1016/j.ejor.2013.12.029

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