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arXiv · 1302.6399

Swing options in commodity markets: A multidimensional L\'evy diffusion model

Marcus Eriksson·Jukka Lempa·Trygve Kastberg Nilssen
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Abstract

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 L\'evy 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.

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Marcus Eriksson, Jukka Lempa, Trygve Kastberg Nilssen. 2013-02-26. Swing options in commodity markets: A multidimensional L\'evy diffusion model. https://arxiv.org/abs/1302.6399

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