Pricing swing options in electricity markets with two stochastic factors using a partial differential equation approach
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Pricing swing options in electricity markets with two stochastic factors using a partial differential equation approachFecha
2017Cita bibliográfica
Calvo-Garrido, M.C., Ehrhardt, M. & Vázquez, C. (2017) Pricing swing options in electricity markets with two stochastic factors using a partial differential equations approach, Journal of Computational Finance, 20 (2017), 3, 81-107. https://doi.org/10.21314/JCF.2016.317
Resumen
[Abstract] In this paper, we consider the numerical valuation of swing options in electricity
markets based on a two-factor model. These kinds of contracts are modeled as pathdependent
options with multiple exercise rights. From a mathematical point of view,
the valuation of these products is posed as a sequence of free boundary problems,
where two exercise rights are separated by a time period. In order to solve the pricing
problem, we propose appropriate numerical methods based on a Crank–Nicolson
semi-Lagrangian method combined with biquadratic Lagrange finite elements for the
discretization of the partial differential equation. In addition, we use an augmented
Lagrangian active set method to cope with the early exercise feature when it appears.
Moreover, we derive appropriate artificial boundary conditions to treat the unbounded
domain numerically. Finally, we present some numerical results to illustrate the proper
behavior of the numerical schemes.
Palabras clave
Swing options
Electricity Price
Augmented Lagrangian active set (ALAS) formulation
Semi-Lagrangian method, Biquadratic Lagrange finite elements
Artificial boundary conditions
Electricity Price
Augmented Lagrangian active set (ALAS) formulation
Semi-Lagrangian method, Biquadratic Lagrange finite elements
Artificial boundary conditions
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