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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
Article

Abstract

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.

Keywords

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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