Development And Application Of A Special Class Of Financial Derivatives

The influence of the weather factor for economic activities have become increasingly prominent, the demand for hedging weather risk becomes more urgent, since the first cases in weather derivatives trading in twentieth Century90years American was born, the weather derivatives market developed rapidly, so far the America Chicago commodity exchange (CME) has developed more than30kinds of weather derivatives, in which the temperature derivatives is the most mature weather derivatives, but how to carry out the reasonable pricing of weather derivatives has been a problem to people.Based on the temperature derivatives as an example, introduces the weather derivatives from the weather futures, options and swaps. In this paper we introduce the use of weather futures hedging operation and the gains or losses of holding weather options. The weather swaps is an important part of weather derivatives and is an important content of weather derivatives from the weather insurance. This article select the temperature index of weather derivatives pricing, the Ornstein-Uhlenbeck mean reverting process model is extended, the fluctuation of temperature on a daily basis, using the DO-U mean reversion model for simulating the change process of temperature, in this paper we selected the daily average temperature data of Wuhan city from1951to2011as the historical data to estimate the parameters of the DO-U mean reversion model, and the Monte Carlo method is used to value the temperature, combined with the real data in2012to do comparative analysis, The relative error between the simulation value and the real value is less than5%, this shows that the DO-U mean reversion model has high reliability. The numerical simulation of temperature can be used as the temperature derivatives pricing. Then this paper discusses the development and application of weather derivatives and analyzes the necessity of China’s development of weather derivatives, to our country the development and application of weather derivatives financial market environment are discussed. Finally, this paper prospect the development and application of weather derivatives in our country.