Electricity swing option pricing by stochastic bilevel optimization: A survey and new approaches

We demonstrate how the pricing problem for electricity swing options can be considered as a stochastic bilevel program with asymmetric information. Unlike as for nancial 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 pro t and risk just acceptable. 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 speci c option contract and anticipate the buyer's optimal reaction to each proposed strike price. We also discuss some methods for nding numerical solutions of stochastic bilevel problems with a special emphasis on methods using duality gap penalizations.