Hi Wilmotters,I am getting really confused here and appreciate your help.Suppose I have a swing option, in a 4 time steps (t0,t1,t2,t3) setting.I have priced the swing option (using trinomial tree using spot prices).How can I say whether it is in the interest of the buyer to exercise on t0 ?Appreciate your help.

I guess another way of putting my question is, what is intrinsic value of a swing option?Is it correct to say that at t0 and before exercising any right, it's intrinsic value is equal to that of American option at t0?

If you have valued the option using a tree setting then I guess you have worked out the exercise strategy without realising it!Say you have m rights left then the price at time t is: max( immediate payoff of 1 right + discounted expected value of (m-1) rights at time t+1, discounted expected value of m rights at time t+1 ) Although the above formula isn't true for all types of swings, which specific swing option are you dealing with?If the above formula applies for your swing then the holder should exercise if: immediate payoff of 1 right + discounted expected value of (m-1) rights at time t+1 >= discounted expected value of m rights at time t+1Hope this helps

Hi Stevo1thanks for the reply, what you said is true, I didn't realize that I had it worked out.The formula that you wrote is the one that applies to the swing that I was working on.I only found out the answer to my question with help of a friend.Thanks again