Pricing Temperature Weather Derivatives
(2012) NEKN02 20121Department of Economics
- Abstract
- The key aim of the current paper is to analyse the plausibility of a pricing model for temperature weather derivatives. The historical data are studied in order to propose a stochastic process that describes temperature dynamics in three Swedish cities. The prices of the contracts in an incomplete market of weather derivatives are obtained using a constant positive market price of risk of a benchmark temperature derivative. Numerical examples of prices of contracts are shown using Monte-Carlo simulations and an approximation formula. The precision of the approximation formula is scrutinized depending on the changes in strike, market price of risk, risk-free rate, mean temperature, speed of mean-reversion and volatility. Moreover,... (More)
- The key aim of the current paper is to analyse the plausibility of a pricing model for temperature weather derivatives. The historical data are studied in order to propose a stochastic process that describes temperature dynamics in three Swedish cities. The prices of the contracts in an incomplete market of weather derivatives are obtained using a constant positive market price of risk of a benchmark temperature derivative. Numerical examples of prices of contracts are shown using Monte-Carlo simulations and an approximation formula. The precision of the approximation formula is scrutinized depending on the changes in strike, market price of risk, risk-free rate, mean temperature, speed of mean-reversion and volatility. Moreover, theoretical prices of temperature options for two Swedish cities, which are not represented on the weather derivative market, are proposed. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/2734000
- author
- Kuvaitseva, Regina LU and Dumitras, Daniela LU
- supervisor
-
- Rikard Green LU
- Karl Larsson LU
- organization
- course
- NEKN02 20121
- year
- 2012
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Weather derivatives, commodities, temperature stochastic modelling, Monte-Carlo simulations, market price of risk
- language
- English
- id
- 2734000
- date added to LUP
- 2012-06-08 14:33:31
- date last changed
- 2012-06-08 14:33:31
@misc{2734000, abstract = {{The key aim of the current paper is to analyse the plausibility of a pricing model for temperature weather derivatives. The historical data are studied in order to propose a stochastic process that describes temperature dynamics in three Swedish cities. The prices of the contracts in an incomplete market of weather derivatives are obtained using a constant positive market price of risk of a benchmark temperature derivative. Numerical examples of prices of contracts are shown using Monte-Carlo simulations and an approximation formula. The precision of the approximation formula is scrutinized depending on the changes in strike, market price of risk, risk-free rate, mean temperature, speed of mean-reversion and volatility. Moreover, theoretical prices of temperature options for two Swedish cities, which are not represented on the weather derivative market, are proposed.}}, author = {{Kuvaitseva, Regina and Dumitras, Daniela}}, language = {{eng}}, note = {{Student Paper}}, title = {{Pricing Temperature Weather Derivatives}}, year = {{2012}}, }