Options on temperature and wind

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 7 in Modeling and Pricing in Financial Markets for Weather Derivatives, 2012, pp 157-177 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn this chapter we price and hedge options written on weather forward contracts. We investigate European call and put options on temperature and wind forwards. Options on temperature forwards are offered for trade at the CME, while wind forward options were introduced but the US Futures Exchange was closed. A novel aspect of weather markets, namely the possibility to hedge weather risk playing on the spatial dependency of weather factors, is introduced in this Chapter. We call it geographical hedging. Geographical hedging implies using weather contracts at various locations to hedge the weather risk at a given adjacent location.

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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