Pricing of Weather Options for Berlin Quoted on the Chicago Mercantile Exchange
At present the global weather derivatives market is developing very fast. Only in the recent period (April 2007 - March 2008) the notional value of all weather contracts reached over 32 billion USD. As a result of such a dynamic increase on this market the problem of appropriate weather options pricing appears more often. Usually in these situations, the Black-Scholes formula is used. Unfortunately, many observers and weather market participants have noticed that this approach cannot be applied because of the different nature of weather underlying. It must be added, that the unique and complex features of weather indices made it impossible until now to create any complete and universal procedure for pricing this class of instruments. For this reason many different approaches of pricing weather derivatives have been proposed. The most popular are: historical burn analysis, index modelling and daily modelling. Among these, the last one seems to have the greatest potential in creating one precise approach of pricing all weather contracts. Therefore in this paper we concentrate on daily modelling as an approach which makes use of models of stochastic processes. Moreover this work we analyse not only daily time series, but also monthly values of weather indices. (fragment of text)
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