Loading...

Quantitative Energy Finance by Fred Espen Benth Valery A. Kholodnyi & Peter Laurence

Quantitative Energy Finance by Fred Espen Benth Valery A. Kholodnyi & Peter Laurence

Author:Fred Espen Benth, Valery A. Kholodnyi & Peter Laurence
Language: eng
Format: epub
Publisher: Springer New York, New York, NY


4.6 Other Approaches

In the previous sections we have reviewed a number of mathematical techniques to price swing options. These techniques were split into two loose categories; first of them approaching the pricing problem from a purely probabilistic point of view whereas the second focusing on the interplay between stochastic control problems and partial differential equations. In addition to these, there is a selection of other techniques available in the literature. We review some of these techniques in this section.

The tree methods are a popular technique for option pricing—for an early study on multistrike path-dependent contingent claims, see [36]. In [25], the authors develop a trinomial-tree approach to swing option pricing. They use a well-known technique called backward induction to solve pricing problem. The induction starts on from the option’s expiration date and is done backwards in time in three dimensions: price, number of exercise rights left, and usage level. Assume that the holder has k exercise rights left. At each date, she chooses between exercising or waiting. Waiting corresponds to staying on the current tree associated with k remaining exercise rights whereas exercise corresponds to jumping down to the tree with k − 1 remaining exercise rights. So in fact, the solution is found not only on one but a forest of trees. Using this approach, the authors develop a numerical method for swing option pricing stemming from the trinomial tree building procedure of [23]. The approximating tree is built on the spot price process given as an Ornstein-Uhlenbeck process



Download



Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.