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Pricing and hedging quanto options in energy markets

journal contribution
posted on 2023-06-09, 03:58 authored by Fred Espen Benth, Nina Lange, Tor Åge Myklebust
In energy markets, the use of quanto options has increased significantly in recent years. The payoff from such options are typically written on an underlying energy index and a measure of temperature. They are suited to managing the joint price and volume risk in energy markets. Using a Heath-Jarrow-Morton approach, we derive a closed-form option pricing formula for energy quanto options under the assumption that the underlying assets are lognormally distributed. Our approach encompasses several interesting cases, such as geometric Brownian motions and multifactor spot models. We also derive Delta and Gamma expressions for hedging. Further, we illustrate the use of our model by an empirical pricing exercise using NewYork Mercantile Exchange-traded natural gas futures and Chicago Mercantile Exchange-traded heating degree days futures for New York.

History

Publication status

  • Published

Journal

Journal of Energy Markets

ISSN

1756-3607

Publisher

Incisive Media

Issue

1

Volume

8

Page range

1-35

Department affiliated with

  • Business and Management Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2016-11-08

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