Pricing of point-to-point bandwidth contracts

In this paper we consider the pricing of point-to-point bandwidth leasing contracts and options. The underlying asset of these contracts is a point-to-point telecommunications connection. Due to the network structure the network capacity prices depend nonlinearly on each other. A leasing contract on a point-to-point connection can be seen as an option because the seller of the connection selects the cheapest path between the points. Therefore, a bandwidth option is a compound option.