Journal
ANNALS OF OPERATIONS RESEARCH
Volume 185, Issue 1, Pages 139-160Publisher
SPRINGER
DOI: 10.1007/s10479-009-0599-z
Keywords
Swing options; Regime-switching process; Lattice approach
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Gasoline price is highly volatile and exhibits Markov regime-switching process. In the electricity and the natural gas markets, swing options, which can provide some protection against day-to-day price fluctuations, are used to incorporate flexibility in delivering acquired energy. We propose a framework for pricing swing options for an underlying variable that follows a regime-switching process. We study the proposed framework in the gasoline industry for pricing swing options under price uncertainty by extracting the gasoline market information, estimating the parameters of the regime-switching process, and then presenting different numerical examples.
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