Swing options in commodity markets: a multidimensional Lévy diffusion model
Journal article, Peer reviewed
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Original versionEriksson, M., Lempa, J., & Nilssen, T. K. (2013). Swing options in commodity markets: a multidimensional Lévy diffusion model. Mathematical Methods of Operations Research, 1-37. doi: 10.1007/s00186-013-0452-7 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.
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