Pricing swing options with regime switching

Gasoline price is highly volatile and exhibits Markov regime‐switching process. In the electricity and the natural gas markets, ‘swing’ options, which can provide some protection against day‐to‐day price fluctuations, are used to incorporate flexibility in delivering acquired energy. We propose a framework for pricing swing options for an underlying variable that follows a regime‐switching process. We study the proposed framework in the gasoline industry for pricing swing options under price uncertainty by extracting the gasoline market information, estimating the parameters of the regime‐switching process, and then presenting different numerical examples.