On modelling and pricing weather derivatives

The main objective of the work described is to find a pricing model for weather derivatives with payouts depending on temperature. Historical data are used to suggest a stochastic process that describes the evolution of the temperature. Since temperature is a non-tradable quantity, unique prices of contracts in an incomplete market are obtained using the market price of risk. Numerical examples of prices of some contracts are presented, using an approximation formula as well as Monte Carlo simulations.

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Year of publication:	2002
Authors:	Alaton, Peter ; Djehiche, Boualem ; Stillberger, David
Published in:	Applied Mathematical Finance. - Taylor & Francis Journals, ISSN 1350-486X. - Vol. 9.2002, 1, p. 1-20
Publisher:	Taylor & Francis Journals
Subject:	Weather Derivatives \| Pricing Model \| Historical Data \| Stochastic Process \| Approximation Formula \| Monte Carlo Simulation

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Type of publication:	Article
Source:	RePEc - Research Papers in Economics

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