Operating a swing option on today's gas markets : how least squares Monte Carlo works and why it is beneficial

Marc Hanfeld (Wintershall Holding GmbH), Stephan Schlüter (University of Applied Sciences Ulm, University of Erlangen-Nürnberg)

We investigate, if it pays off for a company to invest into complex swing option algorithms. We first introduce least squares Monte Carlo as a complex valuation algorithm and explain in detail how it works. Using a simulation study and two backtest scenarios we compare the output of this method with a simple myopic approach, and evaluate the results also from a business point of view. We find that myopic operation performs fairly well, but given a certain contract size and a certain contract flexibility, LSMC clearly prevails.

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Year of publication:	[2016]
Authors:	Hanfeld, Marc ; Schlüter, Stephan
Publisher:	Erlangen-Nürnberg : Friedrich-Alexander-Universität Erlangen-Nürnberg, Institute for Economics
Subject:	Swing Option \| Spot Optimization \| Least Squares Monte Carlo \| Monte-Carlo-Simulation \| Monte Carlo simulation \| Optionspreistheorie \| Option pricing theory \| Optionsgeschäft \| Option trading \| Kleinste-Quadrate-Methode \| Least squares method