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

2013 | OriginalPaper | Chapter

8. The Effects of the Geographical and Basis Risk

Authors : Antonis K. Alexandridis, Achilleas D. Zapranis

Published in: Weather Derivatives

Publisher: Springer New York

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Abstract

This chapter reviews in detail the notion of basis risk in the weather market. In contrast to classical financial markets, basis risk in the sense of weather derivatives has a different definition. First, the notion of geographical basis risk is analyzed, and a spatial model for temperature is presented. Next, the basis risk between the revenues of a company from electricity sector that uses weather derivatives and a weather variable is discussed. The payoff of a weather derivative depends on a weather index and not on the actual amount of money lost due to weather; although temperature and electricity consumption are highly correlated, it is unlikely that the payoff will compensate exactly for the money lost.

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previous chapter Using Meteorological Forecasts for Improving Weather Derivative Pricing
next chapter Pricing the Power of Wind
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Metadata
Title
The Effects of the Geographical and Basis Risk
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_8