This dissertation was written as part of the MSc in
Banking and Finance at the
International Hellenic University.
Option pricing plays an important role in financial
, energy, and commodity
markets. The aim of this thesis is to examine and understand the background of the
electricity market and how it works, as well as the
fundamentals of the type of option,
i.e. the swing option, which is an American-style
contract with multiple exercise rights.
Next, an analysis of what swing options are, how they are traded and how a swing option contract looks like will be presented. Also, a
n examination of the variables affecting the price and structure of a swing option contract will be under scope. Finally, to
examine the various methods used for pricing energy
swing options so far, a comparison of the two numerical methods involved in the pr
icing of swing options in the electricity market will be performed. The existing and
widely accepted electricity price process models, the Monte Carlo and finite difference,
will be used to calibrate the price
of swing options and make a comparison with numerical solutions obtained from each
method, and with the already existing theory. Further contributions of this thesis include the presentation of the codes used on MATLAB
for the pricing of swing option
and how they were created.
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