Swing options in commodity markets: A multidimensional Lévy diffusion model

Author(s)

Publication date

2013-08-29

Series/Report no

Mathematical Methods of Operations Research;79(1)

Publisher

Springer

Document type

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 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.

Keywords

Version

This is a postprint version of the published article. The definitive version is available at springerlink.com

Permanent URL (for citation purposes)

  • http://hdl.handle.net/10642/2524