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R. Kovacevic, G. Pflug:
"Electricity Swing Option Pricing by Stochastic Bilevel Optimization: a Survey and New Approaches";
European Journal of Operational Research, 237 (2014), 2; 389 - 403.

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.

Pricing, Swing option, Bilevel optimization, Stochastic optimization, Stackelberg game

http://dx.doi.org/10.1016/j.ejor.2013.12.029