Modelling Environment Changes for Pricing Weather Derivatives

Stanimir Kabaivanov, Veneta Markovska

Abstract


This paper focuses on modelling environment changes in a way that allows to price weather derivatives in a flexible and efficient way. Applications and importance of climate and weather contracts extends beyond financial markets and hedging as they can be used as complementary tools for risk assessment. In addition, option-based approach toward resource management can offer very special insights on rare-events and allow to reuse derivative pricing methods to improve natural resources management. To demonstrate this general concept, we use Monte Carlo and stochastic modelling of temperatures to evaluate weather options. Research results are accompanied by R and Python code.

Keywords


weather derivatives, temperature modelling, Monte Carlo

JEL Codes


G13, G17, G18

Full Text:

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References


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DOI: http://dx.doi.org/10.1515/saeb-2017-0031

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