A FIRST‐ORDER BSPDE FOR SWING OPTION PRICING: CLASSICAL SOLUTIONS

DOI10.1111/MAFI.12096zbMATH Open1414.91362arXiv1402.6444OpenAlexW2150477532MaRDI QIDQ5283407FDOQ5283407

Authors: Christian Bender, Nikolai Dokuchaev 

Publication date: 21 July 2017

Published in: Mathematical Finance (Search for Journal in Brave)

Abstract: In Bender and Dokuchaev (2013), we studied a control problem related to swing option pricing in a general non-Markovian setting. The main result there shows that the value process of this control problem can be uniquely characterized in terms of a first order backward SPDE and a pathwise differential inclusion. In the present paper we additionally assume that the cashflow process of the swing option is left-continuous in expectation (LCE). Under this assumption we show that the value process is continuously differentiable in the space variable that represents the volume which the holder of the option can still exercise until maturity. This gives rise to an existence and uniqueness result for the corresponding backward SPDE in a classical sense. We also explicitly represent the space derivative of the value process in terms of a nonstandard optimal stopping problem over a subset of predictable stopping times. This representation can be applied to derive a dual minimization problem in terms of martingales.

Full work available at URL: https://arxiv.org/abs/1402.6444

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zbMATH Keywords

optimal stoppingstochastic optimal controlswing optionsdual minimization problemfirst-order backward stochastic partial differential equationpathwise differential inclusion

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Stopping times; optimal stopping problems; gambling theory (60G40) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)

Cites Work

• A first-order BSPDE for swing option pricing
• Probabilistic aspects of finite-fuel stochastic control
• Equivalent models for finite-fuel stochastic control
• Information relaxations and duality in stochastic dynamic programs
• Dual pricing of multi-exercise options under volume constraints
• Primal and Dual Pricing of Multiple Exercise Options in Continuous Time
• Continuously controlled options: derivatives with added flexibility
• Optimal exercise of swing contracts in energy markets: an integral constrained stochastic optimal control problem

Cited In (3)

• On degenerate backward SPDEs in bounded domains under non-local conditions
• A first-order BSPDE for swing option pricing
• Efficient algorithms of pathwise dynamic programming for decision optimization in mining operations

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