Pricing Temperature Derivatives

  • Antonis K. Alexandridis
  • Achilleas D. Zapranis
Chapter

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.

Keywords

Europe Convolution Volatility 

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Antonis K. Alexandridis
    • 1
  • Achilleas D. Zapranis
    • 2
  1. 1.School of Mathematics, Statistics and Actuarial ScienceUniversity of KentCanterburyUK
  2. 2.Department of Accounting and FinanceUniversity of MacedoniaThessalonikiGreece

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