Swing options in commodity markets: a multidimensional Lévy diffusion model

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 Lévy process. We set up a valuation model in terms of a dynamic programming problem where the option can be e...

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Vydáno v:Mathematical methods of operations research (Heidelberg, Germany) Ročník 79; číslo 1; s. 31 - 67
Hlavní autoři: Eriksson, Marcus, Lempa, Jukka, Nilssen, Trygve Kastberg
Médium: Journal Article
Jazyk:angličtina
Vydáno: Berlin/Heidelberg Springer Berlin Heidelberg 01.02.2014
Springer Nature B.V
Témata:
Business and Management
Calculus of Variations and Optimal Control; Optimization
Commodities
Commodity prices
Dynamic programming
Mathematical models
Mathematics
Mathematics and Statistics
Operations research
Operations Research/Decision Theory
Original Article
Securities prices
Studies
Valuation
Multi-factor model
Dynamic programming problem
HJB-equation
Lévy diffusion
Swing option
Flexible load contract
Finite difference method
ISSN:1432-2994, 1432-5217
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Popis
Shrnutí: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 Lévy 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.
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ISSN:1432-2994
1432-5217
DOI:10.1007/s00186-013-0452-7