Weather Derivatives

WEATHER DERIVATIVES 1. Description of go Derivatives Most of the die gravid derivatives get their payoff based on Heating business relationship eld (HDD) or CDD. The typical derivatives contract is illustrated by the pursual try out: Option type: CALL implicit in(p): Heating Degree Days Contract period: November 1, 1999 litigate 31, 2000 Met Office: lucre/OHargon Airport Strike: 5000 Dollars per whole: $10,000 supreme payoff: $2,000,000 Starting from November 1, 1999 the side by side(p) expression 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 accompaniment day W(I). It means that: W(I)=(Tmax(I) +Tmin(I))/2 2. The next step is the reckoner science of the offset from 65°F. The HDD(I) computing formula is the by-line: 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 all historic period 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 domiciliate be calculated on the day following the conclusion 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 trade winds price is described in Izzy Nelkens Weather Deriv atives-Prices and hedging. Two different app! roaches to weather option pricing are introduced in that working paper, they are the so called flip ones wig outline and Model for Weather . The first approach is widely use in the insurance industry and answers the following theoretic 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 interpreted to answer...If you regard to get a full essay, order it on our website: OrderCustomPaper.com

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