Swing Options and Volume Flexibility
Swing contracts grant flexible volume each period within local and global bounds, making them path-dependent real options.
Swing options allow the holder to choose volumes within min/max bounds over time, subject to total volume constraints.
Exercise decisions depend on realised and expected future prices, making valuation a dynamic programming problem.
Swing exposure combines price risk, volume risk, and constraint risk, and is central to gas and structured power portfolios.
This visual shows a stylised swing contract: per-period min/max volumes, a global cap, and a simple greedy exercise policy. The upper panel is price and strike; the lower panel is cumulative volume with local and global constraints.
A swing option is not just a sum of independent call options. Local and global volume constraints couple decisions across time: exercising more now leaves less flexibility later.
The greedy policy here captures value by sorting periods by (P − K) and filling up to the constraints. Real valuation uses dynamic programming or stochastic control, but the mental model is simple: choose volume each period inside a band, with a running total budget, to harvest price spikes.