IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/hal-04358505.html
   My bibliography  Save this paper

Risk valuation of quanto derivatives on temperature and electricity

Author

Listed:
  • Aurélien Alfonsi

    (MATHRISK - Mathematical Risk Handling - UPEM - Université Paris-Est Marne-la-Vallée - ENPC - École des Ponts ParisTech - Inria de Paris - Inria - Institut National de Recherche en Informatique et en Automatique, CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - ENPC - École des Ponts ParisTech)

  • Nerea Vadillo

    (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - ENPC - École des Ponts ParisTech)

Abstract

This paper develops a coupled model for day-ahead electricity prices and average daily temperature which allows to model quanto weather and energy derivatives. These products have gained on popularity as they enable to hedge against both volumetric and price risks. Electricity day-ahead prices and average daily temperatures are modelled through non homogeneous Ornstein-Uhlenbeck processes driven by a Brownian motion and a Normal Inverse Gaussian Lévy process, which allows to include dependence between them. A Conditional Least Square method is developed to estimate the different parameters of the model and used on real data. Then, explicit and semi-explicit formulas are obtained for derivatives including quanto options and compared with Monte Carlo simulations. Last, we develop explicit formulas to hedge statically single and double sided quanto options by a portfolio of electricity options and temperature options (CDD or HDD).

Suggested Citation

  • Aurélien Alfonsi & Nerea Vadillo, 2023. "Risk valuation of quanto derivatives on temperature and electricity," Working Papers hal-04358505, HAL.
    • Handle: RePEc:hal:wpaper:hal-04358505
    DOI: 10.48550/arXiv.2310.07692
    Note: View the original document on HAL open archive server: https://hal.science/hal-04358505v1
    as

    Download full text from publisher

    File URL: https://hal.science/hal-04358505v1/document
    Download Restriction: no
    File URL: https://libkey.io/10.48550/arXiv.2310.07692?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-04358505. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.