Pricing swing options with regime switching

M. Wahab () and Chi-Guhn Lee

Annals of Operations Research, 2011, vol. 185, issue 1, 139-160

Abstract: Gasoline price is highly volatile and exhibits Markov regime-switching process. In the electricity and the natural gas markets, “swing” options, which can provide some protection against day-to-day price fluctuations, are used to incorporate flexibility in delivering acquired energy. We propose a framework for pricing swing options for an underlying variable that follows a regime-switching process. We study the proposed framework in the gasoline industry for pricing swing options under price uncertainty by extracting the gasoline market information, estimating the parameters of the regime-switching process, and then presenting different numerical examples. Copyright Springer Science+Business Media, LLC 2011

Keywords: Swing options; Regime-switching process; Lattice approach (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s10479-009-0599-z

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