Pricing commodity swing options

33 Pages Posted: 20 Feb 2020

See all articles by Roberto Daluiso

Roberto Daluiso

Banca IMI

Emanuele Nastasi

Exprivia S.p.A.

Andrea Pallavicini

Banca IMI; Imperial College London - Department of Mathematics

Giulio Sartorelli

Banca IMI

Date Written: January 24, 2020

Abstract

In commodity and energy markets swing options allow the buyer to hedge against futures price fluctuations and to select its preferred delivery strategy within daily or periodic constraints, possibly fixed by observing quoted futures contracts. In this paper we focus on the natural gas market and we present a dynamical model for commodity futures prices able to calibrate liquid market quotes and to imply the volatility smile for futures contracts with different delivery periods. We implement the numerical problem by means of a least-square Monte Carlo simulation and we investigate alternative approaches based on reinforcement learning algorithms.

Keywords: Commodity, Swing Option, Volatility Smile, Local Volatility, Least-Square Monte Carlo, Reinforcement Learning, Proximal Policy Optimization

JEL Classification: C63, G13

Suggested Citation

Daluiso, Roberto and Nastasi, Emanuele and Pallavicini, Andrea and Sartorelli, Giulio, Pricing commodity swing options (January 24, 2020). Available at SSRN: https://ssrn.com/abstract=3524802 or http://dx.doi.org/10.2139/ssrn.3524802

Roberto Daluiso

Banca IMI ( email )

Largo Mattioli 2
Milano, 20100
Italy

Emanuele Nastasi

Exprivia S.p.A. ( email )

Via A. Olivetti 11
Molfetta, Bari 70056
Italy

Andrea Pallavicini (Contact Author)

Banca IMI ( email )

Largo Mattioli 3
Milan, MI 20121
Italy
+39 02 7261 (Phone)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom

Giulio Sartorelli

Banca IMI ( email )

Largo Mattioli,3
Milano, 20121
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
34
Abstract Views
210
PlumX Metrics