×

The volatility of temperature and pricing of weather derivatives. (English) Zbl 1151.91481

Summary: We propose an Ornstein-Uhlenbeck process with seasonal volatility to model the time dynamics of daily average temperatures. The model is fitted to approximately 45 years of daily observations recorded in Stockholm, one of the European cities for which there is a trade in weather futures and options on the Chicago Mercantile Exchange. Explicit pricing dynamics for futures contracts written on the number of heating/cooling degree-days (so-called HDD/CDD futures) and the cumulative average daily temperature (so-called CAT futures) are calculated, along with a discussion on how to evaluate call and put options with these futures as underlying.

MSC:

91G20 Derivative securities (option pricing, hedging, etc.)
PDFBibTeX XMLCite
Full Text: DOI Link

References:

[1] DOI: 10.1080/13504860210132897 · Zbl 1013.91036
[2] DOI: 10.1142/S0219024904002360 · Zbl 1107.91309
[3] DOI: 10.1080/1350486042000271638 · Zbl 1093.91021
[4] DOI: 10.1016/0304-4076(86)90063-1 · Zbl 0616.62119
[5] DOI: 10.1088/1469-7688/2/3/302
[6] DOI: 10.1198/016214504000001051 · Zbl 1117.62305
[7] DOI: 10.1080/713665730
[8] Dornier F, Weather Risk Special Report pp 30– (2000)
[9] Samuelson P, Ind. Mgmt Rev. 6 pp 13– (1965)
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.