Swing options in commodity markets: A multidimensional Lévy diffusion model
Journal article, Peer reviewed
This is a postprint version of the published article. the definitive version is available at springerlink.com
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Date
2013-08-29Metadata
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Original version
Eriksson, Marcus Karl Viren Lempa, Jukka Nilssen, Trygve Kastberg . Swing options in commodity markets: A multidimensional Lévy diffusion model. Mathematical Methods of Operations Research. 2014, 79(1), 31-67 http://dx.doi.org/10.1007/s00186-013-0452-7Abstract
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.