Electricity swing option pricing by stochastic bilevel optimization: A survey and new approaches |
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Authors: | Raimund M. Kovacevic Georg Ch. Pflug |
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Affiliation: | 1. Institute of Statistics and Operations Research, University of Vienna, Universitätsstrasse 5/9, A-1010 Vienna, Austria;2. International Institute for Applied Systems Analysis, Schlossplatz 1, A-2361 Laxenburg, Austria |
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Abstract: | 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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Keywords: | Pricing Swing option Bilevel optimization Stochastic optimization Stackelberg game |
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