Pricing Weather Derivatives

The weather has an important impact on many industries.General weather risk is that excepting hurricanes, floods and other enormous disasters, the risk of uncertainty related to business income due to the temperature, humidity, rain, wind and other causes . Traditional risk management strategies can not be good to avoid such risks. As a new risk management tools ,Weather derivatives can be used more widely in weather risk management on the international market at present.Based on their different underlying index, Weather derivatives can be divided into temperature index, the index of rainfall, snowfall and other types of index. Its value will depend on the numerical value of the underlying index and it can take the form of weather futures,weather options, swaps and other financial style.On the basis of the literature about weather derivatives pricing at home and abroad ,this paper used the mean-reversion model as a source of reference, considered the seasonal changes and long-term trend of the temperature , established the stochastic model reflected the temperature changes, applied the average temperature of Shanghai from 1987 to 2006 for estimating the model parameters , constructed the acts of temperature patterns and simulated its possible future random process with Monte Carlo simulation,and then considered designing GDDs for a hypothetical agricultural production enterprises , comed to the use of repeatedly simulated temperature sequence to calculate the derivatives GDDs swap prices, proposaled the weather risk hedging strategy to circumvent the financial risk because of the changing temperature encountered by enterprises.There is a huge market demand for weather derivatives in China,and meteorological information and data have gradually available for weather risk market. Through the analysis of this paper can be seen that launching rhe weather derivative products timely has a practical feasibility on this background, and it also beneficial to hedge the weather risks for related businesses ,to improve the level of investment in China's financial market.