2013-05-13Buch DOI: 10.18452/3059
Electricity Swing Option Pricing by Stochastic Bilevel Optimization: a Survey and New Approaches
Kovacevic, Raimund M.
Pflug, Georg Ch.
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.
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