Pricing swing options with regime switching

Gasoline price is highly volatile and exhibits Markov regime-switching process. In the electricity and the natural gas markets, “swing” options, which can provide some protection against day-to-day price fluctuations, are used to incorporate flexibility in delivering acquired energy. We propose a framework for pricing swing options for an underlying variable that follows a regime-switching process. We study the proposed framework in the gasoline industry for pricing swing options under price uncertainty by extracting the gasoline market information, estimating the parameters of the regime-switching process, and then presenting different numerical examples.