Review of Derivatives Research

, Volume 8, Issue 1, pp 27–47 | Cite as

A Continuous Time Model to Price Commodity-Based Swing Options

  • M. Dahlgren


On the commodity market there exist contracts which give the holder multiple opportunities to adjust delivery of the underlying commodity. These contracts are often named “Swing” or “take-or-pay” options. They are especially common on the electricity market.

In this paper the price of a Swing option on commodities is investigated under the additional constraint of a recovery time between two different exercise times. We give an explicit characterization of the price function as the value function of a continuous stochastic impulse control problem and prove existence of an optimal control. We investigate the connection between the price function and the solution of a system of quasi-variational inequalities. Finally, we present a numerical algorithm for solving the quasi-variational inequalities, and give some numerical examples.


optimal stopping problem HJB quasi-variational inequalities option pricing commodity 


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Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  1. 1.Mathematics LTHCentre for Mathematical SciencesLUNDSweden

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