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Modeling and pricing of space weather derivatives

Birgit Lemmerer () and Stephan Unger ()
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Birgit Lemmerer: University of Graz
Stephan Unger: Saint Anselm College

Risk Management, 2019, vol. 21, issue 4, 265-291

Abstract: Abstract This article proposes a pricing model for space weather derivatives with payout depending on solar activity. By measuring the disturbance of the Earth’s magnetosphere, it is possible to price space weather derivatives which trigger a payoff if a certain level of energization is reached. Since energetic particles emitted by the Sun are a non-tradeable quantity, unique prices of contracts in an incomplete market are obtained using inverse transformation sampling as well as the market price of risk. We find a step-wise decline of option prices with increasing barriers of Kp-index values, a dependence of the option prices on the sunspot cycle, as well as reduced sensitivity of longer-dated maturities for higher Kp-index values.

Keywords: Space weather; Geomagnetic storms; Geomagnetic indices; Space weather derivative; Pricing; Hedging; Inverse transformation sampling (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:pal:risman:v:21:y:2019:i:4:d:10.1057_s41283-019-00052-0