On modelling and pricing weather derivatives
Peter AlatonBoualem DjehicheDept. of Mathematics, KTH, SE-100 44 Stockholm, Sweden. e-mail: [email protected]David Stillberger
2002en
ABI
Abstract
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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