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Published in:
The Weather Derivatives Market Read chapter Read first chapter

2013 | OriginalPaper | Chapter

6. Pricing Temperature Derivatives

Authors : Antonis K. Alexandridis, Achilleas D. Zapranis

Published in: Weather Derivatives

Publisher: Springer New York

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Abstract

In this chapter, pricing formulas for weather derivatives on various temperature indices will be derived. The model that developed in the previous chapter described the daily dynamics of the temperature. Hence, it can be applied in order to estimate the various indices. This model is used for the pricing on futures and options written on various temperature indices used in the weather market. First, the pricing formulas are derived under the assumption of normally distributed residuals. Next, since our results in the previous chapter indicate that the hyperbolic distribution provides the best fit to the residuals, the pricing formulas are derived under the assumption of a Lévy motion driven process.

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previous chapter Modeling the Daily Average Temperature
next chapter Using Meteorological Forecasts for Improving Weather Derivative Pricing
Footnotes
1
The number of cities that the CME trades weather contracts at the end of 2009.
 
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Metadata
Title
Pricing Temperature Derivatives
Authors
Antonis K. Alexandridis
Achilleas D. Zapranis
Copyright Year
2013
Publisher
Springer New York
Book
Weather Derivatives

Print ISBN: 978-1-4614-6070-1

Electronic ISBN: 978-1-4614-6071-8

Copyright Year: 2013

DOI
https://doi.org/10.1007/978-1-4614-6071-8_6