6533b85ffe1ef96bd12c11da

RESEARCH PRODUCT

Swing options in commodity markets: a multidimensional Lévy diffusion model

Trygve K. NilssenMarcus Karl Viren ErikssonJukka Lempa

subject

Dynamic programming problemHJB-equationComputer scienceGeneral MathematicsFinite difference methodManagement Science and Operations ResearchSwingSwing optionFinite difference methodMulti-factor modelLévy diffusionVDP::Social science: 200::Economics: 210::Economics: 212Mathematical economicsFlexible load contractSoftware

description

Author's version of an article in the journal: Mathematical Methods of Operations Research. Also available from the publisher at: http://dx.doi.org/10.1007/s00186-013-0452-7 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.

yearjournalcountryeditionlanguage
2013-08-29Mathematical Methods of Operations Research
https://doi.org/10.1007/s00186-013-0452-7