On the sensitivity analysis 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 Heath-Jarrow-Morton (HJM) framework, by adopting the futures energy dynamics and model with stochastic volatility, we use the Malliavin calculus to derive the energy delta, temperature delta and cross-gamma formulae. The results reveal that these quantities are expressed in terms of expectations of the payoff and a random variable only depending on the underlying dynamics. This work can be viewed as a generalization of the work done, for example, by Benth et al. (2015).