Valuation of Commodity-Based Swing Options
http://www.erasmusenergy.com/articles/196/1/Valuation-of-Commodity-Based-Swing-Options/Page1.html
Sergej Obžigailov
MSc in Econometrics, University of Amsterdam By Sergej Obžigailov
Published on 12/13/2011
Co-author 1: Patrick Jaillet.
Co-author 2: Ehud I. Ronn.
Co-author 3: Stathis Tompaidis.
Abstract
In the energy markets, in particular the electricity and natural gas markets, many contracts incorporate exibility-of-delivery options, known as swing or take-or-pay options. Subject to daily as well as periodic constraints, these contracts permit the option holder to repeatedly exercise the right to receive greater or smaller amounts of energy.
We extract market information from forward prices and volatilities and build a pricing framework for swing options based on a one-factor mean-reverting stochastic process for energy prices which explicitly incorporates seasonal effects. We present a numerical scheme for the valuation of swing options calibrated for the case of natural gas.
Keywords
Swing option, take-or-pay option, mean-reverting stochastic process, seasonal effects in energy prices, natural gas
Link
http://web.mit.edu/jaillet/www/general/swing-last.pdf
Co-author 2: Ehud I. Ronn.
Co-author 3: Stathis Tompaidis.
Abstract
In the energy markets, in particular the electricity and natural gas markets, many contracts incorporate exibility-of-delivery options, known as swing or take-or-pay options. Subject to daily as well as periodic constraints, these contracts permit the option holder to repeatedly exercise the right to receive greater or smaller amounts of energy.
We extract market information from forward prices and volatilities and build a pricing framework for swing options based on a one-factor mean-reverting stochastic process for energy prices which explicitly incorporates seasonal effects. We present a numerical scheme for the valuation of swing options calibrated for the case of natural gas.
Keywords
Swing option, take-or-pay option, mean-reverting stochastic process, seasonal effects in energy prices, natural gas
Link
http://web.mit.edu/jaillet/www/general/swing-last.pdf