IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v13y2010i06ns0219024910006030.html
   My bibliography  Save this article

When Are Swing Options Bang-Bang?

Author

Listed:
  • OLIVIER BARDOU

    (GDF SUEZ, Finance Division, 22 rue du Docteur Lancereaux, 75008 Paris, France)

  • SANDRINE BOUTHEMY

    (GDF SUEZ, CEEMS, 361 Avenue du Président Wilson — B.P. 33, 93211 Saint-Denis La Plaine cedex, France)

  • GILLES PAGÈS

    (Laboratoire de Probabilités et Modèles Aléatoires, UMR 7599, Université Pierre et Marie Curie, case 188, 4, pl. Jussieu, F-75252 Paris Cedex 5, France)

Abstract

In this paper we investigate a class of swing options with firm constraints in view of the modeling of supply agreements. We show, for a fully general payoff process, that the premium, solution to a stochastic control problem, is concave and piecewise affine as a function of the global constraints of the contract. The existence of bang-bang optimal controls is established for a set of constraints which generates by affinity the whole premium function. When the payoff process is driven by an underlying Markov process, we propose a quantization based recursive backward procedure to price these contracts. A priori error bounds are established, uniformly with respect to the global constraints.

Suggested Citation

  • Olivier Bardou & Sandrine Bouthemy & Gilles Pagès, 2010. "When Are Swing Options Bang-Bang?," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(06), pages 867-899.
    • Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:06:n:s0219024910006030
    DOI: 10.1142/S0219024910006030
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024910006030
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024910006030?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hendrik Kohrs & Hermann Mühlichen & Benjamin R. Auer & Frank Schuhmacher, 2019. "Pricing and risk of swing contracts in natural gas markets," Review of Derivatives Research, Springer, vol. 22(1), pages 77-167, April.
    2. Xavier Warin, 2012. "Hedging Swing contract on gas markets," Papers 1208.5303, arXiv.org.
    3. Christian Yeo, 2023. "An analysis of least squares regression and neural networks approximation for the pricing of swing options," Papers 2307.04510, arXiv.org.
    4. J. Lars Kirkby & Shi-Jie Deng, 2019. "Swing Option Pricing By Dynamic Programming With B-Spline Density Projection," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(08), pages 1-53, December.
    5. Gilles Pag`es & Christian Yeo, 2024. "Convex ordering for stochastic control: the swing contracts case," Papers 2406.07464, arXiv.org, revised Jun 2024.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:13:y:2010:i:06:n:s0219024910006030. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.