Weather derivatives and hedging the weather risks

Pricing Weather Derivatives

SPRING 2000 T he impact of weather on business activities is enormous and varies both geographically and seasonally. For example, the 1982-1983 and 1997-1998 El Niño conditions were associated with warm winters in the eastern and midwestern U.S., resulting in significant energy cost savings for consumers and businesses. In addition, these conditions suppressed hurricane activities in the Atlant...

Weather Derivatives and Seasonal Forecast

The purpose of this paper is to incorporate the CPC (Climate Prediction Center) seasonal forecast in the temperature process so that conditional means and conditional variances of both the temperature and the CDD (Cooling Degree Day) may be redetermined in accordance with the seasonal forecasting probabilities. Under the Gaussian property of the underlying process, the prices of the CDD options...

Weather Derivatives in the Presence of Index and Geographical Basis Risk: Hedging Dairy Profit Risk

Weather Derivatives in the Presence of Index and Geographical Basis Risk: Hedging Dairy Profit Risk by

Fair Pricing of Weather Derivatives

This paper proposes a consistent approach to the pricing of weather derivatives. Since weather derivatives are traded in an incomplete market setting, standard hedging based pricing methods cannot be applied. The growth optimal portfolio, which is interpreted as a world stock index, is used as a benchmark or numeraire such that all benchmarked derivative price processes are martingales. No meas...