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Abstract
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We consider the problem of optimal switching with finite horizon. This special case of stochastic impulse control naturally arises during analysis of operational flexibility of exotic energy derivatives. We propose a new method of numerical solution based on recursive optimal stopping. The key tool employed is approximation of the Snell envelopes by simultaneous Monte Carlo regressions using the ideas of Longstaff-Schwartz (2001). This can also be seen as a new numerical scheme for reflected backward stochastic differential equations. We furthermore investigate extensions to tackle other energy contracts, such as gas storage, exhaustible resources and power supply guarantees. Our approach is robust and avoids the ad hoc aspects of quasi-variational inequalities. |
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