Financial markets for weather

Fred Espen Benth and Jūratė Šaltytė Benth
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Fred Espen Benth: University of Oslo, Norway
Jūratė Šaltytė Benth: University of Oslo, Norway

Chapter 1 in Modeling and Pricing in Financial Markets for Weather Derivatives, 2012, pp 1-13 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractBy the year 2011, the notional value of the market for weather derivatives was USD11.8 billion, according to the Weather Risk Management Association (WRMA). The weather markets have grown remarkably in financial strength since the first known weather deals took place in 1996. Nowadays, these markets provide a platform for managing risk exposure in weather variables like temperature, wind and precipitation. The most liquid weather derivatives are based on temperature. In short, these derivatives convert weather into money, where you can profit on bad weather (or good, for that matter).In this monograph we analyze typical weather derivatives traded in the market, both over-the-counter and as customary assets on exchanges. Our aim is to present a unified approach to the statistical modelling of weather factors like temperature, wind speed and precipitation, and apply these models along with the arbitrage theory of mathematical finance to price weather derivatives. In this first Chapter we present typical weather derivatives and the markets they are traded in, before we move on with the statistical analysis of weather and the pricing of weather derivatives.

Keywords: Weather Derivatives; Stochastic Processes; HDD; CDD; Autoregressive Moving Average Time Series; Futures Contracts; Options; Utility Pricing; Girsanov Transform; Esscher Transform; Precipitation; Temperature; Wind Speed (search for similar items in EconPapers)
Date: 2012
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