WHEN ARE SWING OPTIONS BANG-BANG?

Olivier Bardou (), Sandrine Bouthemy () and Gilles Pagès ()
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Olivier Bardou: GDF SUEZ, Finance Division, 22 rue du Docteur Lancereaux, 75008 Paris, France
Sandrine Bouthemy: GDF SUEZ, CEEMS, 361 Avenue du Président Wilson — B.P. 33, 93211 Saint-Denis La Plaine cedex, France
Gilles Pagès: Laboratoire de Probabilités et Modèles Aléatoires, UMR 7599, Université Pierre et Marie Curie, case 188, 4, pl. Jussieu, F-75252 Paris Cedex 5, France

International Journal of Theoretical and Applied Finance (IJTAF), 2010, vol. 13, issue 06, 867-899

Abstract: In this paper we investigate a class of swing options with firm constraints in view of the modeling of supply agreements. We show, for a fully general payoff process, that the premium, solution to a stochastic control problem, is concave and piecewise affine as a function of the global constraints of the contract. The existence of bang-bang optimal controls is established for a set of constraints which generates by affinity the whole premium function. When the payoff process is driven by an underlying Markov process, we propose a quantization based recursive backward procedure to price these contracts. A priori error bounds are established, uniformly with respect to the global constraints.

Keywords: Swing option; stochastic control; optimal quantization; energy (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0219024910006030

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