This is the solution I was originally suggesting – what first occurred to me – and would be fully correct given that the Option contract spec states that it does actually settle by delivery of the underlying monthly Futures.
However, setting up the cascading, and the Q/Y averaging curves is a bit heavyweight.
I was thinking that a simple solution is to set up the Q/Y future as a cash-settling ENGY-EXCH-AVG-FUT, pricing off the average of the 3/12 month price resets of the original M curve.
Hence no cascading, no additional curves.
Then book the option against this AVG Future contract.
The only problem here is I find it impossible to get the ENGY-EXCH-AVG-FUT to take the required monthly reset structure: I can do for a ComSwap, but then if I copy the reset convention parameters to the FUT it doesn’t work.
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