China Weather Derivative Product Design Based On Shanghai Temperature Index

Weather risks are caused by the unpredictability of weather changes.From the perspective of global economic operation,most market participants are affected by weather risks.Among them,energy,agriculture,retail construction,and transportation are the most sensitive to weather.Weather derivatives,as a new financial instrument for weather hedging,have been traded on financial markets since 1996.As the most primitive products of weather derivatives,derivatives based on temperature index are currently the most widely traded in the weather derivatives market.Although the weather derivatives market is still in its infancy globally,it is currently the fastest-growing derivatives market,because a large number of industries cannot eliminate the economic impact of weather risks,and weather-related insurance products are difficult to develop.Therefore,in the context of China's undeveloped weather derivatives market,it is important to design weather derivatives suitable for Chinese cities.This article first refers to the standard weather derivatives design ideas,combined with the current situation of China's weather derivatives market,and considering that at this stage,financial products related to temperature indices have not appeared in China's financial market,temperature indices have no market price,and are no longer based on the market.Research and analysis,but choose a method of modeling daily data to build a temperature model and price the temperature index weather derivatives.Secondly,by analyzing the temperature data of Shanghai from 2000 to 2017,this paper divides the daily average temperature series into three variables,namely,trend variables,seasonal variables and random variables.We established a sine function about time to characterize trend variables and seasonal variables,,for random variables,We have improved the classic temperature prediction model-benth model,we considered the fitness and complexity of the model and finally chose to join ARMA.The model analyzes the daily average data of Shanghai,and uses this temperature prediction model to price the Shanghai temperature index futures and options in combination with Monte Carlo simulation.Finally,the article looks forward to the future development of China's weather derivatives market in terms of the practical application value of weather derivatives in various sectors in China,and proposes relevant policies for the development of weather derivatives in the Chinese market in combination with the current obstacles in the domestic financial market.And suggestions.The establishment of temperature index and product liquidity are indispensable conditions for the development of the weather derivatives market.This article suggests that domestic commodity exchanges can cooperate with the National Meteorological Administration to launch temperature indices for various cities.The domestic financial market will accelerate the improvement of the market maker system.The development of weather derivatives provides a good market environment.