Gas Swing Options

by the liberalisation process, we focus on the introduction and pricing of gas swing options.
These options are embedded in typical gas sales agreements in the form of offtake flexibility
concerning volume and time. The gas swing option is actually a set of several American puts on
a spread between prices of two or more energy commodities. This fact, together with the fact
that the energy markets are fundamentally different from traditional financial security markets,
is important for our choice of valuation technique. Due to the specific features of the energy
markets, the existing analytic approximations for spread option pricing are hardly applicable to
our framework. That is why we employ Monte Carlo methods to model the spot price dynamics
of the underlying commodities. The price of an arbitrarily chosen gas swing option is then
computed in accordance with the concept of risk-neutral expectations. Finally, our result is
compared with the real payoff from the option realised at the time of the option execution
and the maximum ex-post payoff that the buyer could generate in case he knew the future,
discounted to the original time of the option pricing.