Swing options in commodity markets: a multidimensional Lévy diffusion model

Marcus Eriksson (), Jukka Lempa and Trygve Nilssen ()

Mathematical Methods of Operations Research, 2014, vol. 79, issue 1, 67 pages

Abstract: We study valuation of swing options on commodity markets when the commodity prices are driven by multiple factors. The factors are modeled as diffusion processes driven by a multidimensional Lévy process. We set up a valuation model in terms of a dynamic programming problem where the option can be exercised continuously in time. Here, the number of swing rights is given by a total volume constraint. We analyze some general properties of the model and study the solution by analyzing the associated HJB-equation. Furthermore, we discuss the issues caused by the multi-dimensionality of the commodity price model. The results are illustrated numerically with three explicit examples. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Swing option; Flexible load contract; Dynamic programming problem; Multi-factor model; Lévy diffusion; HJB-equation; Finite difference method (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Working Paper: Swing options in commodity markets: A multidimensional L\'evy diffusion model (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:spr:mathme:v:79:y:2014:i:1:p:31-67

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DOI: 10.1007/s00186-013-0452-7

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