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<p>The reform of the electricity market has improved market efficiency while also introducing price and quantity risks to participants in electricity spot trades. Introducing swing options can effectively help market participants efficiently hedge against both types of risks. This study focuses on electricity swing options with high exercise flexibility. Based on a reasonable electricity spot price model, the dynamic programming principle and the finite difference method were utilized to conduct pricing and optimal exercise strategy research, providing reference prices and optimal exercise strategy recommendations for participants. Drawing on the theoretical research results in the existing literature on the existence and uniqueness of the solution to the Hamilton–Jacobi-Bellman equation applicable to this paper, we further used the finite difference method to obtain the numerical solution for swing option valuation and optimal exercise strategies. This study focused on the discretization of the HJB equation and the properties of the numerical scheme, ultimately achieving a locally uniformly convergent unique numerical solution to the HJB equation. Finally, by setting appropriate boundary conditions and parameter values for simulation experiments, a wealth of numerical results was obtained.</p>

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Optimal Exercise and Pricing of Swing Options with Global Constraints under the Regime-Switching Model

  • 期刊论文

  • 发表日期：

    2025年5月26日

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  • Lingjie Shao,
  • Xinyi Xue,
  • Hongran Zhang,
  • Xinyue Fang,
  • Junle Wu

摘要

The reform of the electricity market has improved market efficiency while also introducing price and quantity risks to participants in electricity spot trades. Introducing swing options can effectively help market participants efficiently hedge against both types of risks. This study focuses on electricity swing options with high exercise flexibility. Based on a reasonable electricity spot price model, the dynamic programming principle and the finite difference method were utilized to conduct pricing and optimal exercise strategy research, providing reference prices and optimal exercise strategy recommendations for participants. Drawing on the theoretical research results in the existing literature on the existence and uniqueness of the solution to the Hamilton–Jacobi-Bellman equation applicable to this paper, we further used the finite difference method to obtain the numerical solution for swing option valuation and optimal exercise strategies. This study focused on the discretization of the HJB equation and the properties of the numerical scheme, ultimately achieving a locally uniformly convergent unique numerical solution to the HJB equation. Finally, by setting appropriate boundary conditions and parameter values for simulation experiments, a wealth of numerical results was obtained.