On the sensitivity analysis of energy quanto options

TL;DR

This paper develops a mathematical framework using Malliavin calculus to analyze the sensitivity of energy quanto options, which are unique due to their payoff structure involving energy indices and temperature measures.

Contribution

It extends existing models by deriving delta and cross-gamma formulas for energy quanto options within the HJM framework using Malliavin calculus.

Findings

Derived explicit formulas for delta and cross-gamma sensitivities.

Extended previous models to include energy-specific factors.

Provides a theoretical basis for risk management of energy quanto options.

Abstract

In recent years there has been an advent of quanto options in energy markets. The structure of the payoff is rather a different type from other markets since it is written as a product of an underlying energy index and a measure of temperature. In the HJM framework, by adopting the futures energy dynamics, we use the Malliavin calculus to derive the delta and the cross-gamma expectation formulas. This work can be viewed as an extension of the work done, for example by Benth et al. [1].