Electricity swing option pricing by stochastic bilevel optimization: A survey and new approaches

Kovacevic RM & Pflug GC (2014). Electricity swing option pricing by stochastic bilevel optimization: A survey and new approaches. European Journal of Operational Research 237 (2): 389-403. DOI:10.1016/j.ejor.2013.12.029.

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Abstract

We demonstrate how the problem of determining the ask price for electricity swing options can be considered as a stochastic bilevel program with asymmetric information. Unlike as for financial options, there is no way for basing the pricing method on no-arbitrage arguments. Two main situations are analyzed: if the seller has strong market power he/she might be able to maximize his/her utility, while in fully competitive situations he/she will just look for a price which makes profit and has acceptable risk. In both cases the seller has to consider the decision problem of a potential buyer . the valuation problem of determining a fair value for a specific option contract . and anticipate the buyer's optimal reaction to any proposed strike price. We also discuss some methods for finding numerical solutions of stochastic bilevel problems with a special emphasis on using duality gap penalizations.

Item Type: Article
Uncontrolled Keywords: Pricing; Swing option; Bilevel optimization; Stochastic optimization; Stackelberg game
Research Programs: Risk, Policy and Vulnerability (RPV)
Risk & Resilience (RISK)
Bibliographic Reference: European Journal of Operational Research; 237(2):389-403 (1 September 2014) (Published online 31 December 2013)
Depositing User: IIASA Import
Date Deposited: 15 Jan 2016 08:50
Last Modified: 29 Sep 2016 09:28
URI: http://pure.iiasa.ac.at/10939

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