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A continuous time model to price commodity-based swing options. (English) Zbl 1134.91406
Summary: On the commodity market there exist contracts which give the holder multiple opportunities to adjust delivery of the underlying commodity. These contracts are often named “Swing” or “take-or-pay” options. They are especially common on the electricity market.
In this paper the price of a Swing option on commodities is investigated under the additional constraint of a recovery time between two different exercise times. We give an explicit characterization of the price function as the value function of a continuous stochastic impulse control problem and prove existence of an optimal control. We investigate the connection between the price function and the solution of a system of quasi-variational inequalities. Finally, we present a numerical algorithm for solving the quasi-variational inequalities, and give some numerical examples.

MSC:
91B28 Finance etc. (MSC2000)
60G40 Stopping times; optimal stopping problems; gambling theory
49J40 Variational inequalities
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