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ABSTRACT. In this paper, we evaluate a swing option contract embedded in a real world gas sales agreement. Under special conditions, contracts of this kind can be seen as a strip of American spread options, where the spread is the difference between a calculated contract price and the market price for the reference commodity. The reference commodity is the natural gas traded on the NetConnect Germany. The contract price has four underlying assets, which leads to a multifactor valuation problem for the pricing. Correlated mean-reverting models are chosen for all of the underlying assets. The Monte Carlo approach is used to estimate the fair value of the swing option with one year maturity. The model gives an accurate short-term forecast of the actual company values.
JEL codes: J64

Keywords: gas contract; swing option; Monte Carlo simulation; mean reverting model

How to cite: Fanelli, Viviana, and Anna Katarina Ryden (2018). “Pricing a Swing Contract in a Gas Sale Company,” Economics, Management, and Financial Markets 13(2): 40–55.

Received 7 March 2017 • Received in revised form 8 August 2017
Accepted 8 August 2017 • Available online 28 August 2017

doi:10.22381/EMFM13220183

VIVIANA FANELLI
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University of Bari
(corresponding author)
ANNA KATARINA RYDEN
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Energy finance consultant

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