Skip to main content
SpringerLink
Log in

Pricing Temperature Derivatives

  • Chapter
  • First Online:
Weather Derivatives

  • 2111 Accesses

Abstract

In this chapter, pricing formulas for weather derivatives on various temperature indices will be derived. The model that developed in the previous chapter described the daily dynamics of the temperature. Hence, it can be applied in order to estimate the various indices. This model is used for the pricing on futures and options written on various temperature indices used in the weather market. First, the pricing formulas are derived under the assumption of normally distributed residuals. Next, since our results in the previous chapter indicate that the hyperbolic distribution provides the best fit to the residuals, the pricing formulas are derived under the assumption of a Lévy motion driven process.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 89.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 119.00
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 169.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    The number of cities that the CME trades weather contracts at the end of 2009.

References

  • Alaton P, Djehince B, Stillberg D (2002) On modelling and pricing weather derivatives. Appl Math Finance 9:1–20

    Article  Google Scholar 

  • Bellini F (2005) The weather derivatives market: modelling and pricing temperature. Ph.D. Thesis, University of Lugano, Lugano

    Google Scholar 

  • Benth FE (2003) On arbitrage-free pricing of weather derivatives based on fractional Brownian motion. Appl Math Finance 10:303–324

    Article  Google Scholar 

  • Benth FE (2004) Option theory with stochastic analysis. Springer, Berlin

    Book  Google Scholar 

  • Benth FE, Hardle WK, Lopez Cabrera B (2009) Pricing of Asian temperature risk. SFB649 working paper. Humboldt-Universitat zu Berlin, Berlin

    Google Scholar 

  • Benth FE, Saltyte-Benth J (2004) The normal inverse Gaussian distribution and spot price modeling in energy markets. Int J Theor Appl Finance 7(2):177–192. doi:10.1142/S0219024904002360

    Article  Google Scholar 

  • Benth FE, Saltyte-Benth J (2005) Stochastic modelling of temperature variations with a view towards weather derivatives. Appl Math Finance 12(1):53–85

    Article  Google Scholar 

  • Benth FE, Saltyte-Benth J (2007) The volatility of temperature and pricing of weather derivatives. Quant Finance 7(5):553–561

    Article  Google Scholar 

  • Benth FE, Saltyte-Benth J, Koekebakker S (2008) Stochastic modelling of electricity and related markets, vol 11, Advance series on statistical science & applied probability. World Scientific, Singapore

    Google Scholar 

  • Brockwell PJ, Marquardt T (2005) Levy-driven and fractionality integrated ARMA process with continuous time parameter. Statistica Sinica 15:477–494

    Google Scholar 

  • Brody CD, Syroka J, Zervos M (2002) Dynamical pricing of weather derivatives. Quant Finance 2:189–198

    Article  Google Scholar 

  • Cao M, Wei J (2004) Weather derivatives valuation and market price of weather risk. J Future Markets 24(1):1065–1089

    Article  Google Scholar 

  • Carr M, Madan DB (1999) Option valuation using the fast fourier transform. J Comput Finance 2(4):61–73

    Google Scholar 

  • Davis M (2001) Pricing weather derivatives by marginal value. Quant Finance 1:1–4

    Google Scholar 

  • Garman M, Blanco C, Erickson R (2000) Weather derivatives: instruments and pricing issues. Environ Finance

    Google Scholar 

  • Geman H (1999) Insurance and weather derivatives. RISK Books, London

    Google Scholar 

  • Hardle WK, Lopez Cabrera B (2009) Infering the market price of weather risk. SFB649 working paper. Humboldt-Universitat zu Berlin, Berlin

    Google Scholar 

  • Huang H-H, Shiu Y-M, Lin P-S (2008) HDD and CDD option pricing with market price of weather risk for Taiwan. J Futures Markets 28(8):790–814

    Article  Google Scholar 

  • Ikeda N, Watanabe S (1981) Stochastic differential equations and diffusion processes. North-Holland/Kodansha, Tokyo

    Google Scholar 

  • Jewson S, Brix A, Ziehmann C (2005) Weather derivative valuation: the meteorological, statistical, financial and mathematical foundations. Cambridge University Press, Cambridge, UK

    Book  Google Scholar 

  • Platen E, West J (2005) A fair pricing approach to weather derivatives. Asia-Pacific Financial Markets 11:23–53

    Article  Google Scholar 

  • Richards TJ, Manfredo MR, Sanders DR (2004) Pricing weather derivatives. Am J Agricul Econ 4(86):1005–1017

    Article  Google Scholar 

  • Turvey CG (2005) The pricing of degree-day weather options. Agricul Finance Rev 2005:59–85

    Article  Google Scholar 

  • Xu W, Odening M, Musshof O (2008) Indifference pricing of weather derivatives. Am J Agricul Econ 90(4):979–993

    Article  Google Scholar 

  • Zapranis A, Alexandridis A (2008) Modelling temperature time dependent speed of mean reversion in the context of weather derivative pricing. Appl Math Finance 15(4):355–386

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Mathematics, Statistics and Actuarial Science, University of Kent, Canterbury, UK

    Antonis K. Alexandridis

  2. Department of Accounting and Finance, University of Macedonia, Thessaloniki, Greece

    Achilleas D. Zapranis

Authors
  1. Antonis K. Alexandridis
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Achilleas D. Zapranis
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

Copyright information

© 2013 Springer Science+Business Media New York

About this chapter

Cite this chapter

Alexandridis, A.K., Zapranis, A.D. (2013). Pricing Temperature Derivatives. In: Weather Derivatives. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-6071-8_6

Download citation

Publish with us

Policies and ethics

Search

Navigation