Study On Temperature Based Weather Derivatives And Its Pricing

With the growing emphasis on the influence of weather risk life and production, and how to manage weather risk has also become the focus of global attention. Depending on the degree of probability occurrence and impact, weather risk can be divided into the non-catastrophic weather risk and the severe weather risk. The non-catastrophic weather risk refers to the changes in some of the common weather conditions, such as temperature, humidity, costs and changes in market demand rainfall, caused by wind and other goods, which led to the loss of corporate profits and cash flow. Many industries will be subject to non-catastrophic weather risk, direct or indirect effects, such as the energy industry, agriculture, construction, beverage industry, transportation, tourism, manufacturing, finance and insurance industries. Thus, companies or individuals for non-catastrophic weather risk management are necessary. There is a demand there will be a corresponding supply, weather derivatives have come into being. Weather derivatives are a special risk management tool, is aimed primarily at non-catastrophic weather risk. Weather Risk Management Committee (WRMA) statistics show that only the period from2006to2007, worldwide trading weather derivatives contracts total up to more than730,000copies, which contracts the total transactions of weather derivatives temperatures reached nearly19billion U.S. dollars, accounting for80%of total trading weather derivatives contract amount.Our country is more sensitive to the changes in the weather, so the weather risks can make a significant impact on many industries. Only through insurance or reinsurance to manage it obviously cannot meet our needs. Weather derivatives should launch timely in our country, In the field, although some studies combining of our country has done some preliminary analysis and recommendations, but it’s not thorough enough.The first chapter is introduction. First of all, we determine the research purpose, significance and content. Secondly, through the reading massive literature summary, finding that of foreign literature mainly focuses on pricing and the effect of hedging, while the domestic literature is mainly a qualitative study of weather derivatives. Finally, this article summarizes the innovation and inadequate.The second chapter is the overview of weather derivatives. Weather forecast, weather index insurance and weather derivatives are strategies of weather risk management. The weather derivatives are similar with weather insurance and financial derivatives. But there are still some differences. Finally, a more detailed description of the emergence and development of weather derivatives is introduced.In the third chapter, we mainly introduced the three basic index and financial forms of the weather derivatives. Among them, the temperature index is the main content. Because its weather derivatives transactions accounted for about80%of total trading products.The fourth chapter is an innovation of this paper. The paper chooses weather derivatives based on temperature as study object. The average temperature data of Shenyang city from the year1951to2012were used to estimate the model parameters, and data from January1,2013to November30,2013were used for a comparison. Result shows that the time series model based on ARMA fits the actual datas very well.In chapter five, we introduced several general weather derivatives pricing methods. Then using Monte Carlo pricing method, we tried to price the temperature index future and option.Chapter six is the thoughts on the development of China’s weather derivatives. After analyzing the necessity and feasibility of development of weather derivatives in China, we tried to propose the concrete ideas to develop our temperatures futures.This article’s main innovation lies in:(1) when we builded the average daily temperature model, the ARMA time series was used, laying a good foundation for later in weather future and option pricing.(2) Based on foreigen futures contracts and our actual situation, we tried to propose the concrete ideas to develop our temperatures futures.(3) This paper summarized a lot of literatures of weather derivatives, basically summing up more representative research works in this area in recent years.