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Posted: June 30th, 2022
Valuation of Swing Options and Examination of Exercise Strategies
Valuation of Swing Options and Examination of Exercise Strategies
Long-staff Schwartz technique for American and Bermudan options
Monte-Carlo simulation methods are used to investigate (standardized) Swing options. In a first approach, this is done by an algorithm which is based on the Long-staff Schwartz technique for American and Bermudan options. This algorithm yields the value of the Swing option under the supposition that the optimal exercise strategy is applied. Thus the optimal strategy will be extracted from the algorithm. Several examples including Swing options with upswings, penalties and downswings are valued numerically, and an upper boundary for Swing options is found in the computer experiment. In a second approach, the exercise strategy is used as input parameter and the expected pay-off with respect to this strategy is calculated by strictly forward evolving Monte Carlo. For these simulations, a one factor log-normal mean-reverting process is used to explain the behavior of the underlying spot price. The success of several sample strategies is discussed in terms of process properties like mean- reversion volatility and speed.
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