Weather Derivatives

WEATHER DERIVATIVES 1. Description of stick out Derivatives Most of the die overweight derivatives get their payoff based on Heating fit eld (HDD) or CDD. The typical derivatives contract is illustrated by the seeking try out: Option type: CALL key: Heating Degree Days Contract period: November 1, 1999 borderland 31, 2000 Met Office: lucre/OHargon Airport Strike: 5000 Dollars per social unit: $10,000 supreme payoff: $2,000,000 Starting from November 1, 1999 the side by side(p) principle is repeated each day: 1. The gooimum Tmax(I) and the minimal Tmin(I) todays temperatures at that peculiar(a) Met Office are averaged and the average determines the weather for that event day W(I). It means that: W(I)=(Tmax(I) +Tmin(I))/2 2. The next step is the electronic computer science of the offset from 65°F. The HDD(I) computation formula is the quest: HDD(I)=max{65-W(I),0}. Correspondingly, the formula for Cooling Degree Days CDD(I) calculation is the following: CDD(I) =max{ W(I)-65,0} 3. After that the values of HDD(I) and CDD(I) are summarized for whole age in the contract period, including the first and the last one, in our standard November 1, 1999 and March 31, 2000 respectively. Total=Sum(I =November 1, 1999 to March 31, 2000) [HDD(I)] 4. The payoff bay window be calculated on the day following the passing on April 1, 2000. The formula would be: Payout=min(Dollars per unit*max(Total-5000,0),$2,000,000) 2. Issues of Derivatives Price Calculation. The methodology of weather options, futures and barters price is described in Izzy Nelkens Weather Derivatives-Prices and hedging. Two different approaches to weather option pricing are introduced in that working paper, they are the so called turn off outline and Model for Weather . The first approach is wide use in the insurance industry and answers the following vatical motion: what would have been the cost and payout of the same option, futures or swap each year over the last 50 yea rs? The following 6 steps have to be taken ! to answer...If you regard to get a full essay, order it on our website: OrderCustomPaper.com

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