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

Kovacevic, R.M. & Pflug, G.C. ORCID: https://orcid.org/0000-0001-8215-3550 (2014). Electricity swing option pricing by stochastic bilevel optimization: A survey and new approaches. European Journal of Operational Research 237 (2) 389-403. 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 & Resilience (RISK) Risk, Policy and Vulnerability (RPV)
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:	27 Aug 2021 17:24
URI:	https://pure.iiasa.ac.at/10939

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