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Swing options in commodity markets: a multidimensional Lévy diffusion model. (English) Zbl 1287.91140
The authors propose and analyze a model for the valuation of a swing option written on multiple commodities. The commodity spot prices are driven by multiple factors. The factors are modeled as diffusion processes driven by a multidimensional Lévy process. The valuation model is formulated as a dynamic programming problem in continuous time.
The authors derive some general properties of the model and study the solution by analyzing the associated HJB equation.
The results are illustrated numerically in three cases: Ornstein-Uhlenbeck factor dynamics with Brownian driver, Ornstein-Uhlenbeck factor dynamics driven by a sum of a Brownian motion and a compound Poisson process, and a two-factor model based on a Lévy process.

91G20 Derivative securities (option pricing, hedging, etc.)
60G51 Processes with independent increments; Lévy processes
60J60 Diffusion processes
90C39 Dynamic programming
91G60 Numerical methods (including Monte Carlo methods)
Full Text: DOI arXiv
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