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When are Swing options bang-bang and how to use it

Abstract : In this paper we investigate a class of swing options with firm constraints in view of the modeling of supply agreements. We show, for a fully general payoff process, that the premium, solution to a stochastic control problem, is concave and piecewise affine as a function of the global constraints of the contract. The existence of bang-bang optimal controls is established for a set of constraints which generates by affinity the whole premium function. When the payoff process is driven by an underlying Markov process, we propose a quantization based recursive backward procedure to price these contracts. A priori error bounds are established, uniformly with respect to the global constraints.
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Submitted on : Thursday, May 3, 2007 - 3:46:20 PM
Last modification on : Monday, December 14, 2020 - 9:43:39 AM
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Olivier Bardou, Sandrine Bouthemy, Gilles Pagès. When are Swing options bang-bang and how to use it. International Journal of Theoretical and Applied Finance, World Scientific Publishing, 2010, 13 (6), 867-899 ; http://dx.doi.org/10.1142/S0219024910006030. ⟨10.1142/S0219024910006030⟩. ⟨hal-00144517⟩

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