In the natural gas (NG) market, contracts incorporate flexibility in the volume of the product. These contracts are known as swing options. Such contracts allow the option holder to exercise the right to receive greater or smaller amounts of NG contracted in accordance with market. Variation in the price of NG, which is the main source of uncertainty, was modeled in this study as a stochastic process using the two-factor model of Schwartz and Smith (2000), which was incorporated into assessment of the quarterly seasonality. To estimate NG spot prices using the Henry Hub prices of futures contracts traded on the NYMEX, it was necessary to implement the Kalman filter. The pricing of the option was conducted using the binomial tree model bi-variable developed by Hahn and Dyer (2011). The value of the swing option was positive in both cases analyzed, indicating that this option should be considered for inclusion in NG contracts. The characteristics of the analysis were the same as those specified in Jaillet, Ronn and Tompaidis (2004).
Finance; Derivatives; Contracts pricing; Stochastic processes
