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

DOI10.1111/MAFI.12096MaRDI QIDQ5283407zbMATHOpenAlexFDO

Authors Christian Bender, Nikolai Dokuchaev

Publication date 21 July 2017

Published in Mathematical Finance (Search for Journal in Brave)

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

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)

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.

Recommendations

• A first-order BSPDE for swing option pricing
• Swing options valuation: a BSDE with constrained jumps approach
• Swing option pricing by dynamic programming with b-spline density projection
• Pricing of Swing Options in a Mean Reverting Model with Jumps
• Numerical methods for the pricing of swing options: a stochastic control approach
• Efficient pricing of swing options in Lévy-driven models
• Swing Option Pricing by Optimal Exercise Boundary Estimation
• Optimal Quantization for the Pricing of Swing Options
• A direct solution method for pricing options in regime-switching models
• The viscosity solutions approach to swing options pricing under a regime-switching mean-reverting model

Cites work

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

Cited in

(3)

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

This page was built for publication: A FIRST‐ORDER BSPDE FOR SWING OPTION PRICING: CLASSICAL SOLUTIONS

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5283407)