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Operating a swing option on today's gas markets: How least squares Monte Carlo works and why it is beneficial

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  • Hanfeld, Marc
  • Schlüter, Stephan

Abstract

We investigate, if it pays off for a company to invest into complex swing option algorithms. We first introduce least squares Monte Carlo as a complex valuation algorithm and explain in detail how it works. Using a simulation study and two backtest scenarios we compare the output of this method with a simple myopic approach, and evaluate the results also from a business point of view. We find that myopic operation performs fairly well, but given a certain contract size and a certain contract flexibility, LSMC clearly prevails.

Suggested Citation

  • Hanfeld, Marc & Schlüter, Stephan, 2016. "Operating a swing option on today's gas markets: How least squares Monte Carlo works and why it is beneficial," FAU Discussion Papers in Economics 10/2016, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    • Handle: RePEc:zbw:iwqwdp:102016
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    References listed on IDEAS

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    Keywords

    Swing Option; Spot Optimization; Least Squares Monte Carlo;
    All these keywords.

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