A First-Order BSPDE for Swing Option Pricing: Classical Solutions
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In a companion paper, we studied a control problem related to swing option pricing in a general non-Markovian setting. The main result there shows that the value process of this control problem can uniquely be characterized in terms of a first-order backward stochastic partial differential equation (BSPDE) and a pathwise differential inclusion. In this paper, we additionally assume that the cash flow process of the swing option is left-continuous in expectation. Under this assumption, we show that the value process is continuously differentiable in the space variable that represents the volume in which the holder of the option can still exercise until maturity. This gives rise to an existence and uniqueness result for the corresponding BSPDE in a classical sense. We also explicitly represent the space derivative of the value process in terms of a nonstandard optimal stopping problem over a subset of predictable stopping times. This representation can be applied to derive a dual minimization problem in terms of martingales.
This is the peer reviewed version of the above-cited article, which has been published in final form at http://doi.org/10.1111/mafi.12096. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving at http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms
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