I'm working in the commodity market and I've to price Swing Options with MATLAB, preferably with finite element.

Has anyone already priced these kind of derivatives?

I'm thinking about using the structure for the pricing of an American Option and then do it iteratively.

More details about Swing Options are included in this paper.

Note that swing options are really useful in commodity markets because you can exercise them more than once (like American options); obviously there are some constraints that limit you.

I've already tried to price them with Least Squares Monte Carlo method (using the algorithm presented by Longstaff and Schwartz).

Now I want to price them with finite element but I'm having some difficulties. In particular I'm pricing them without jumps, so I'm using an EDP discretized (and not a PIDE).

I'd like to know if anyone already implemented such a thing?

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    $\begingroup$ Hi Alberto, welcome to QuantSE. You're question would be much better if you included a link to a page where people can read about Swing options (even better if you take 5 minutes to write it down). I can see you tried to express that you tried something or had something I mind for the solution, but it looks too light. Just give some background to the question, you'll have a better chance to get an answer. $\endgroup$ – SRKX Jul 21 '14 at 13:53
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    $\begingroup$ You created another question, which I deleted. You should have edited this one, which I did for you by merging the contents. $\endgroup$ – SRKX Jul 21 '14 at 14:10
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    $\begingroup$ I think Exxon Mobile quiet often deals with Swing Options. You might get a contact on LinkedIn. (I will also ask some colleagues if they can give me more references.) $\endgroup$ – Markus Jul 21 '14 at 15:43
  • $\begingroup$ I really thank you. I appreciate any possible other informations that you can get. There are lots of linkedin's contact in Exxon Mobile, can you suggest me one in particular? $\endgroup$ – alberto Jul 21 '14 at 16:04

You have to use stochastic dynamic programming methods, and the Bellman equation.

It's not very different to price an American Option with Longstaff-Schwartz, except that your state variable is not just exercised/not exercised, but a continuous one in order to take into account the consumed volume.

In Longstaff-Schwartz you have to do a regression in the asset price, but here you have to do it on a functional space of the prices and volumes.

You may find this document useful.


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