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PRICING A SWING CONTRACT IN A GAS SALE COMPANY

PRICING A SWING CONTRACT IN A GAS SALE COMPANY In this paper, we evaluate a swing option contract embedded in a real world gas sales agreement. Under special conditions, contracts of this kind can be seen as a strip of American spread options, where the spread is the difference between a calculated contract price and the market price for the reference commodity. The reference commodity is the natural gas traded on the NetConnect Germany. The contract price has four underlying assets, which leads to a multifactor valuation problem for the pricing. Correlated mean-reverting models are chosen for all of the underlying assets. The Monte Carlo approach is used to estimate the fair value of the swing option with one year maturity. The model gives an accurate short -term forecast of the actual company values. JEL codes: J64 Keywords: gas contract; swing option; Monte Carlo simulation; mean reverting model http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economics, Management, and Financial Markets Addleton Academic Publishers

PRICING A SWING CONTRACT IN A GAS SALE COMPANY

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Publisher
Addleton Academic Publishers
Copyright
© 2009 Addleton Academic Publishers
ISSN
1842-3191
eISSN
1938-212X
Publisher site
See Article on Publisher Site

Abstract

In this paper, we evaluate a swing option contract embedded in a real world gas sales agreement. Under special conditions, contracts of this kind can be seen as a strip of American spread options, where the spread is the difference between a calculated contract price and the market price for the reference commodity. The reference commodity is the natural gas traded on the NetConnect Germany. The contract price has four underlying assets, which leads to a multifactor valuation problem for the pricing. Correlated mean-reverting models are chosen for all of the underlying assets. The Monte Carlo approach is used to estimate the fair value of the swing option with one year maturity. The model gives an accurate short -term forecast of the actual company values. JEL codes: J64 Keywords: gas contract; swing option; Monte Carlo simulation; mean reverting model

Journal

Economics, Management, and Financial MarketsAddleton Academic Publishers

Published: Jan 1, 2018

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