Electricity swing option pricing by stochastic bilevel optimization: a survey and new approaches. (English) Zbl 1304.91218
Summary: 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.
MSC:
| 91G20 | Derivative securities (option pricing, hedging, etc.) |
| 91A80 | Applications of game theory |
| 90C15 | Stochastic programming |
| 91B76 | Environmental economics (natural resource models, harvesting, pollution, etc.) |
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