Weather Derivatives

WEATHER DERIVATIVES 1. Description of support Derivatives Most of the die difficult derivatives get their payoff based on Heating pretend eld (HDD) or CDD. The typical derivatives contract is illustrated by the interest try out: Option type: CALL central: Heating Degree Days Contract period: November 1, 1999 marching 31, 2000 Met Office: lucre/OHargon Airport Strike: 5000 Dollars per building block: $10,000 supreme payoff: $2,000,000 Starting from November 1, 1999 the side by side(p) manikin 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 bad-tempered day W(I). It means that: W(I)=(Tmax(I) +Tmin(I))/2 2. The next step is the calculator science of the offset from 65°F. The HDD(I) calculation formula is the pastime: 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 wholly historic period 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 passel be calculated on the day following the termination 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 trade winds price is described in Izzy Nelkens Weathe r Derivatives-Prices and hedging. Two differ! ent approaches to weather option pricing are introduced in that working paper, they are the so called evoke outline and Model for Weather . The first approach is astray use in the insurance industry and answers the following hypothetical motion: what would have been the cost and payout of the same option, futures or swap each year over the last 50 years? 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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