An efficient pricing algorithm for swing options based on fourier cosine expansions

Report (2010)
Faculty
Electrical Engineering, Mathematics and Computer Science (EEMCS) (TU Delft)
Copyright: ©2010 Zhang, B., Oosterlee, C.W.
More Info
expand_more

Published Date

04-02-2010

Reuse Rights

Other than for strictly personal use, it is not permitted to download, forward or distribute the text or part of it, without the consent of the author(s) and/or copyright holder(s), unless the work is under an open content license such as Creative Commons.

Source:

Reports of the Department of Applied Mathematical Analysis, 10-04

ISSN:

1389-6520

Faculty

Electrical Engineering, Mathematics and Computer Science

Abstract

Swing options give contract holders the right to modify amounts of future delivery of certain commodities, such as electricity or gas. In this paper, we assume that these options can be exercised at any time before the end of the contract, and more than once. However, a recovery time between any two consecutive exercise dates is incorporated as a constraint to avoid continuous exercise. We introduce an efficient way of pricing these swing options, based on the Fourier cosine expansion method, which is especially suitable when the underlying is modeled by a Lévy process.

Files

10.04.Zhang.pdf
(pdf | 0.352 Mb)