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Journal cover: Managerial Finance

Managerial Finance

ISSN: 0307-4358

Online from: 1975

Subject Area: Accounting and Finance

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Alternative approaches to weather derivatives pricing

Document Information:
Title:Alternative approaches to weather derivatives pricing
Author(s):Hélyette Geman, (University Paris Dauphine and ESSEC), Marie-Pascale Leonardi, (University Paris Dauphine and ESSEC, PhD Program)
Citation:Hélyette Geman, Marie-Pascale Leonardi, (2005) "Alternative approaches to weather derivatives pricing", Managerial Finance, Vol. 31 Iss: 6, pp.46 - 72
Keywords:Acceptable risk, Actuarial pricing, Incomplete markets, Weather derivatives
Article type:Research paper
DOI:10.1108/03074350510769695 (Permanent URL)
Publisher:Emerald Group Publishing Limited
Abstract:The goal of the paper is to analyse the various issues attached to the valuation of weather derivatives. We focus our study on temperature-related contracts since they are the most widely traded at this point and try to address the following questions: (i) should the quantity underlying the swaps or options contracts be defined as the temperature, degree-days or cumulative degree-days? This discussion is conducted both in terms of the robustness of the statistical modelling of the state variable and the mathematical valuation of the option (European versus Asian). (ii) What pricing approaches can tackle the market incompleteness generated by a non-tradable underlying when furthermore the market price of risk is hard to identify in other traded instruments and unlikely to be zero? We illustrate our study on a database of temperatures registered at Paris Le Bourget and compare the calls and puts prices obtained using the different methods most widely used in weather markets.

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