Study Of The Development And Pricing Of China’s Weather Derivatives Based On Precipitation

As is known to all, the influence of human’s production and life by weather risk is more and more evident. In order to avoid the uncertain impact by weather risk to human’s production and life, a new financial instrument named weather derivatives is gradually into people’s vision. With the promotion and popularization of weather derivatives, weather derivatives are increasingly well-known and needs to people. Although the temperature index always takes a leadership position in the market and its operation mechanism is relatively mature, the precipitation index is also in constant development. And precipitation index is at present been the second largest index in the weather derivatives market. Agriculture is most closely related to weather, light, heat, moisture and other conditions are needed in the growth of crops, weather is good or bad directly affect the good harvest of crops. There is a vast territory of agricultural land in China, temperature and precipitation are essential factors in agricultural production. Moderate temperature and precipitation are necessary conditions for crops growth, the temperature is too high or too low, the precipitation is too much or too little, all these can bring losses to crops. So in concerned with temperature index, at the same time, the precipitation index is also an important part which needs our attention.This paper first discusses the emergence and development of weather derivatives market, and the type of weather derivatives, as well as its risk management function on agricultural risk management. Next we describe the development status of the weather derivatives market at home and abroad, focusing on analysis of the situation of China’s market demand. Then, according to the existing temperature index futures contract rules at abroad, we try to design precipitation index futures contract in our country initially. Then on the basis of researches on the temperature index, we make regression analysis to the monthly precipitation of Nanjing from January1979to December2012using time series model ARIMA. We obtain a model on monthly precipitation of Nanjing and forecast the precipitation of Nanjing in2012. At the same time, we introduce several methods for pricing of weather derivatives and price options contracts of precipitation index by Monte Carlo method. Finally, the paper put forward application prospects of weather derivatives in our country and some relevant suggestions on the construction of weather derivatives market.