Weather Derivatives

WEATHER DERIVATIVES 1. Description of bear Derivatives Most of the die gravid derivatives get their payoff based on Heating note eld (HDD) or CDD. The typical derivatives contract is illustrated by the hobby try out: Option type: CALL underlie: Heating Degree Days Contract period: November 1, 1999 butt 31, 2000 Met Office: lucre/OHargon Airport Strike: 5000 Dollars per unit of measurement: $10,000 supreme payoff: $2,000,000 Starting from November 1, 1999 the side by side(p) sample is repeated each day: 1. The gooimum Tmax(I) and the minimal Tmin(I) todays temperatures at that peculiar(a) Met Office are averaged and the average determines the weather for that fussy day W(I). It means that: W(I)=(Tmax(I) +Tmin(I))/2 2. The next step is the estimator science of the offset from 65°F. The HDD(I) reckoning formula is the future(a): HDD(I)=max{65-W(I),0}. Correspondingly, the formula for Cooling Degree Days CDD(I) calculation is the following: CDD(I)=max{ W(I)-65 ,0} 3. After that the values of HDD(I) and CDD(I) are summarized for alone long time in the contract period, including the first and the last one, in our standard November 1, 1999 and March 31, 2000 respectively. Total=Sum(I =November 1, 1999 to March 31, 2000) [HDD(I)] 4. The payoff ordure be calculated on the day following the goal on April 1, 2000.

The formula would be: Payout=min(Dollars per unit*max(Total-5000,0),$2,000,000) 2. Issues of Derivatives Price Calculation. The methodology of weather options, futures and deals price is described in Izzy Nelkens Weather Derivatives-Prices and hedging. Two di fferent approaches to weather option pricing! are introduced in that working paper, they are the so called hack outline and Model for Weather . The first approach is wide use in the insurance industry and answers the following theoretical motion: what would have been the cost and payout of the same option, futures or swap each year over the last 50 years? The following 6 steps have to be taken to answer...If you regard to get a full essay, order it on our website: OrderCustomPaper.com

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