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Mathematics of Swing Options: A Survey

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Quantitative Energy Finance

Abstract

This paper is a survey article on mathematical theories and techniques used in the study of swing options. In financial terms, swing options can be regarded as multiple-strike American or Bermudan options with specific constraints on the exerciseability. We focus on two categories of approaches: martingale and Markovian methods. Martingale methods build on purely probabilistic properties of the models whereas Markovian methods draw on the interplay between stochastic control and partial differential equations. We also review other techniques available in the literature.

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Notes

  1. 1.

    Commodity markets are incomplete in general so the pricing measure is not unique; see, e.g., [7]. We omit the discussion on the choice of the pricing measure.

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Authors and Affiliations

  1. Centre of Mathematics for Applications, University of Oslo, 1053, Blindern, N–0316, Oslo, Norway

    Jukka Lempa

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  1. Jukka Lempa
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Correspondence to Jukka Lempa .

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Editors and Affiliations

  1. Center of Mathematics for Applications, University of Oslo, Oslo, Norway

    Fred Espen Benth

  2. Verbund Trading AG, Vienna, Austria

    Valery A. Kholodnyi

  3. Dipartimento di Matematica, University di Roma, La Sapienza, Rome, Italy

    Peter Laurence

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Lempa, J. (2014). Mathematics of Swing Options: A Survey. In: Benth, F., Kholodnyi, V., Laurence, P. (eds) Quantitative Energy Finance. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7248-3_4

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