SWING OPTION PRICING BY DYNAMIC PROGRAMMING WITH B-SPLINE DENSITY PROJECTION

J. Lars Kirkby and Shi-Jie Deng ()
Additional contact information
J. Lars Kirkby: School of Industrial and Systems Engineering, Georgia Institute of Technology, 755 Ferst Drive, NW, Atlanta, GA 30332, USA
Shi-Jie Deng: School of Industrial and Systems Engineering, Georgia Institute of Technology, 755 Ferst Drive, NW, Atlanta, GA 30332, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2019, vol. 22, issue 08, 1-53

Abstract: Swing options are a type of exotic financial derivative which generalize American options to allow for multiple early-exercise actions during the contract period. These contracts are widely traded in commodity and energy markets, but are often difficult to value using standard techniques due to their complexity and strong path-dependency. There are numerous interesting varieties of swing options, which differ in terms of their intermediate cash flows, and the constraints (both local and global) which they impose on early-exercise (swing) decisions. We introduce an efficient and general purpose transform-based method for pricing discrete and continuously monitored swing options under exponential Lévy models, which applies to contracts with fixed rights clauses, as well as recovery time delays between exercise. The approach combines dynamic programming with an efficient method for calculating the continuation value between monitoring dates, and applies generally to multiple early-exercise contracts, providing a unified framework for pricing a large class of exotic derivatives. Efficiency and accuracy of the method are supported by a series of numerical experiments which further provide benchmark prices for future research.

Keywords: Swing options; American option; early-exercise; optimal multiple stopping; exotic options; fast Fourier transform; Lévy processes; basis; characteristic function; FFT; multiple exercise (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/abs/10.1142/S0219024919500389
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:22:y:2019:i:08:n:s0219024919500389

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024919500389

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().