The Research Of Weather Option Pricing Based On Temperature Data Of Chengdu

Weather risk is the uncertainty which is brought by weather and climate change to people’s lives and property, production and business activities and economic development. According to the probability of occurrence of weather risk and the consequences of it, the weather risk can be divided into three categories. They are the weather disaster risk, the general weather risk and climate change risks. For the general weather risk, traditional risk management strategies are not well avoid, and weather derivatives can be very good to avoid such risks.Weather derivatives are the new derivative products which are based on the basic value of the temperature, wind speed, humidity, rainfall, snowfall and other weather conditions of a certain region. In China, the study of weather derivatives is still in fancy, the weather derivatives market has not been established.In this paper, we study the papers of pricing of weather derivatives both home and abroad, select the temperature data from January1,1951to December31,2011in Chengdu,use Ornstein-Uhlenbeck process to establish the stochastic model of temperature, estimate the parameters of the model, get the parameters distribution of the temperature, predict the temperature with the Monte Carlo method.Then take a power company in Chengdu for example, apply risk-neutral pricing method for pricing weather derivatives. This shows that the Monte Carlo method is a good method for the pricing of options for the temperature derivatives inChina,and it provides some reference value to the research of China’s temperature derivatives. But we also note that the physical formation of temperature is extremely complex, especially in China. The study of the technical design of temperature options is not enough, we need to further explore the theory and practice. Weather risk is the uncertainty which is brought by weather and climate change to people’s lives and property, production and business activities and economic development. According to the probability of occurrence of weather risk and the consequences of it, the weather risk can be divided into three categories. They are the weather disaster risk, the general weather risk and climate change risks. For the general weather risk, traditional risk management strategies are not well avoid, and weather derivatives can be very good to avoid such risks. Weather derivatives are the new derivative products which are based on the basic value of the temperature, wind speed, humidity, rainfall, snowfall and other weather conditions of a certain region. In China, the study of weather derivatives is still in its in fancy, the weather derivatives market has not been established. However, due to China’s vast territory, the weather is quite different in different regions, the enormous economic losses to many industries and regions which are brought by the weather risk are enormous and quite serious. If we can develop weather derivatives as soon as possible, we will effectively reduce the losses of agriculture and other related businesses. Weather derivatives have many types, they are futures, options, swaps, etc. In this paper, these products were introduced one by one. On the basis of the literature about weather derivatives pricing at home and abroad, we take the history temperature of Chengdu for example, establish the stochastic model of temperature to predict the temperature, and use Monte Carlo methods for option pricing. The results show that with deadline of the option approaching, the temperature in Chengdu and the value of the option price are increasingly close. This shows that the Monte Carlo method, is a good method for the pricing of options for the temperature derivatives in China,and it provides some reference value to the research of China’s temperature derivatives. But we also note that the physical formation of temperature is extremely complex, especially in China. The study of the technical design of temperature options is not enough, we need to further explore the theory and practice.