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

Since ancient times,weather and climate changes have affected people's daily lives and agricultural production activities.In modern times,weather changes have had a more significant impact on the entire society.People are increasingly aware of the importance of weather risk management and development.The weather risk management market has gradually become the focus of global attention.Weather risk refers to the uncertainty of future weather and climate change.According to the frequency of weather risk and its impact,it can be divided into severe weather risk and non-disastrous weather risk.Severe weather mainly refers,to sudden weather such as heavy rain,drought,tornadoes,typhoons,hurricanes,and frost.It usually occurs in a certain season and is not visible throughout the year.Non-disaster weather mainly refers to general weather such as temperature,wind,rain and snow.The financial risks caused by the uncertainty of the corporate profits caused by such weather changes are called non-disastrous weather risks or general weather risks.In 1996,the energy company Aquila Energy and the utility company Consolidated Edison completed the first transaction on weather risk.Since then,financial transactions concerning the risk of hedging weather have begun to sprout off the OTC market.In the second half of 1999,the Chicago Mercantile Exchange(CME)introduced the first weather derivatives based on the temperature and weather index,from which weather derivatives began to flourish and gradually took over.At present,the transaction amount of on-site and off-site weather derivatives can reach tens of billions of dollars.According to WRMA statistics,in the past ten years,the energy industry is the main player in the weather derivatives market,which can account for nearly 70%of the share,followed by agriculture.In addition,insurance companies,pension funds,state governments,hedge funds,utilities,and retailers are all important players in the weather derivatives market.In order to provide better weather risk management methods for related industries,CME currently offers weather futures,weather options and weather futures options based on the temperature index,snowfall index,rainfall index,hurricane index,and dense fog index,covering the United States,More than 50 cities in Europe,Asia,Australia and Canada.In recent years,weather disasters have occurred frequently in China,which has caused various degrees of impact on domestic agriculture,energy industry,beverage and food industry,transportation and many other industries.At present,there are only two types of financial instruments that can be used to manage weather risks in China,namely insurance and catastrophe bonds.Obviously,these two tools cannot meet the increasing demand for risk hedging in industries affected by weather risks.However,weather derivatives are the most effective financial tools for hedging the weather risk.China's exploration of it is still in its infancy.At present,the Dalian Commodity Exchange has only introduced monthly average temperatures and monthly CDD/HDD indexes in five cities of Harbin,Beijing,Wuhan,Shanghai and Guangzhou.There are no tradable weather derivatives on the market,and there is no available forparticipants to trade.market.At the same time,the Chinese government has implemented many related policies and measures to improve relevant laws and regulations to promote the development of the weather derivatives market.This article briefly introduced the concepts related to weather derivatives and the types of weather indices.It was learned that temperature index derivatives are the weather derivatives with the earliest trading hours and the largest transaction amount.In extensive reading of previous academic research on the design,development,and pricing of weather derivatives,it was found that the selection of this type of derivative pricing model heavily relied on the climatic conditions of the selected target location,and the model chosen for different climate conditions was not the same.At the same time,when the literature was reorganized,it was found that domestic scholars had conducted research on the pricing of the temperature index options in the cities of Shenyang and Harbin,but there were no documents that analyzed the temperature index options in Dalian.Therefore,considering the provision of a pricing reference concept for the future introduction of Dalian temperature index options,we selected Dalian temperature data from July 1,1997 to December 31,2017 as samples.Using Eviews7.0 and MATLAB for statistical analysis of sample data,it was found that the sample data has seasonal statistical characteristics.Therefore,we divide the daily average temperature series into two variables,namely the trend variable,the seasonal variable and the random variable.For trends and seasonal variables,we establish a sine function with respect to time,and use linear regression analysis;for random variables,we consider the model's fitness,complexity,etc.,and finally choose to use ARMA model based on time The sequence model predicts and analyzes the daily average data of Dalian City from 1997 to 2016 for 20 years.After model modification and parameter estimation,ARMA(2,2)is found to be the most suitable.Then,from January 1,2017 to December 31,2017,a total of 365 daily average temperature values were taken out of the sample to test the goodness of fit of the selected model.Secondly,the Monte Carlo simulation method was used to simulate and finally the contract prices for the HDDs and CDDs options were obtained.The results show that if Dashang launched the temperature index option in Dalian,this time series model can be used to price it.Finally,this article briefly introduces the case of risk management based on temperature index options for agriculture,energy industry and tourism.