Finite Element Method for Pricing Swing Options under Stochastic Volatility

Abstract

This paper studies the pricing of a swing option under the stochastic volatility. A swing option is an American -style contract with multiple exercise rights. As such, it is an optimal multiple-stopping time problem. In this paper, we reduce the problem to a sequence of optimal single stopping time problems. We propose an algorithm based on the finite element method to value the contract in a Black-Scholes - Merton frame-work. In many real- world applications, the volatility is typically not a constant. Stochastic volatility models are commonly used for modeling dynamic changes of volatility. Here we introduce an approach to handle this added complication and present numerical results to demonstrate that the approach is accurate and efficient.