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 MonteCarlo simulations and an approximation formula. The precision of the approximation formula is scrutinized depending on the changes in strike, market price of risk, riskfree rate, mean temperature, speed of meanreversion 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 MonteCarlo simulations and an approximation formula. The precision of the approximation formula is scrutinized depending on the changes in strike, market price of risk, riskfree rate, mean temperature, speed of meanreversion 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/studentpapers/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, MonteCarlo simulations, market price of risk
 language
 English
 id
 2734000
 date added to LUP
 20120608 14:33:31
 date last changed
 20120608 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 MonteCarlo simulations and an approximation formula. The precision of the approximation formula is scrutinized depending on the changes in strike, market price of risk, riskfree rate, mean temperature, speed of meanreversion 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}, keyword = {Weather derivatives,commodities,temperature stochastic modelling,MonteCarlo simulations,market price of risk}, language = {eng}, note = {Student Paper}, title = {Pricing Temperature Weather Derivatives}, year = {2012}, }