Hedging Swing contract on gas markets

TL;DR

This paper investigates the valuation and dynamic hedging strategies for swing options in gas markets, which are complex American-style contracts with daily and annual constraints, aiming to maximize expected profit.

Contribution

It introduces a method for valuing and hedging swing gas contracts considering their unique constraints and payoff structure, enhancing risk management approaches.

Findings

Effective dynamic hedging strategies are developed for swing contracts.

The valuation method accounts for daily and annual exercise constraints.

Results demonstrate improved profit maximization under realistic market conditions.

Abstract

Swing options on the gas market are american style option where daily quantities exercices are constrained and global quantities exerciced each year constrained too. The option holder has to decide each day how much he consumes of the quantities satisfying the constraints and tries to use a strategy in order to maximize its expected profit. The pay off fonction is a spread between the spot gas market and the value of an index composed of the past average of some commodities spot or future prices. We study the valorization and the effectiveness of the dynamic hedging of such a contract.