Pricing weather derivatives
Κορδή, Κωνσταντίνα Ι.
SubjectWeather derivatives ; Παράγωγα ; Derivative securities ; Διαχείριση κινδύνου -- Οικονομετρικά μοντέλα
Weather Derivatives were first introduced in the USA in 1997 and their creation was driven by the need of companies whose revenues were related to weather fluctuations to hedge against the risk of unwanted weather conditions. Weather Derivatives belong to a different class of derivatives as their underly¬ing asset (weather) is not tradable and this leads to ordinary pricing models (such as Black and Scholes formula) not being applicable. A lot of paperwork was directed towards the pricing of these products and the modeling of the daily average temperature which characterizes the majority of the traded in¬struments. This thesis analyzes a suggested model which describes the evolution of temperature which is expressed as a sum of a deterministic and a stochastic part, and discusses 3 different approaches for pricing weather options and weather futures: Pricing under an Equivalent Martingale Measure, Arbi¬trage Free Pricing and Actuarial Pricing. Then it presents implementations for each of the models on temperature call options and compares their results; for the implementation it uses Monte Carlo simulations.