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A new lattice-based scheme for swing option pricing under mean-reverting regime-switching jump-diffusion processes. (English) Zbl 1448.91290

Summary: Swing options are complex path-dependent contracts, granting their holders a prefixed number of transaction rights to buy/sell a variable amount of the underlying asset (e.g. energy commodities) subject to daily or periodic constraints. Stating the swing option price as the solution of a stochastic optimal control problem, we employ a dynamic programming formulation in which the underlying asset price is modeled by a mean-reverting regime-switching jump-diffusion process. We explore a newly devised lattice-based pricing framework to find the premium of swing options in a cost-effective and easily implementable manner. We compare the performance of the proposed tree building procedure with a simulation-based least-squares Monte Carlo (LSM) approach.

MSC:

91G20 Derivative securities (option pricing, hedging, etc.)
93E20 Optimal stochastic control
60J74 Jump processes on discrete state spaces
90C39 Dynamic programming
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