Pricing weather derivatives by marginal value

M. Davis

Quantitative Finance, 2001, vol. 1, issue 3, 305-308

Abstract: Weather derivatives are a classic incomplete market. This paper gives a preliminary exploration of weather derivative pricing using the 'marginal substitution value' or 'shadow price' approach of mathematical economics. Accumulated heating degree days (HDD) and commodity prices are modelled as geometric Brownian motion, leading to explicit expressions for swap rates and option values.

Date: 2001
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DOI: 10.1080/713665730

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