Weather Derivatives

WEATHER DERIVATIVES 1. Description of hold Derivatives Most of the die securely derivatives get their payoff based on Heating strike eld (HDD) or CDD. The typical derivatives contract is illustrated by the chase try out: Option type: CALL implicit in(p): Heating Degree Days Contract period: November 1, 1999 butt against 31, 2000 Met Office: lucre/OHargon Airport Strike: 5000 Dollars per building block: $10,000 supreme payoff: $2,000,000 Starting from November 1, 1999 the side by side(p) principle 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 circumstance day W(I). It means that: W(I)=(Tmax(I) +Tmin(I))/2 2. The next step is the figurer science of the offset from 65°F. The HDD(I) weighing formula is the following: 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 wholly 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 apprise be calculated on the day following the way out 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 methodological analysis of weather options, futures and crafts determine is described in Izzy Nelken s Weather Derivatives-Prices and hedging. Tw! o different approaches to weather option pricing are introduced in that working paper, they are the so called open fire outline and Model for Weather . The first approach is widely use in the insurance industry and answers the following mantic 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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