Swing options in commodity markets: A multidimensional L\'evy diffusion model

Marcus Eriksson, Jukka Lempa and Trygve Kastberg Nilssen

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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 L\'evy 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.

Date: 2013-02
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Citations: View citations in EconPapers (2)

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Journal Article: Swing options in commodity markets: a multidimensional Lévy diffusion model (2014)
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