Research On Weather Derivative Pricing Based On Markov Regime-Switching Model

People have always been plagued by weather risks,and the awareness of weather risks has become more and more profound,and the need to avoid weather risks has become stronger and stronger.Therefore,the weather derivatives market came into being.In China,industries with strong weather sensitivity such as agriculture,energy,electricity and transportation are seriously endangered by the weather,and there is no weather derivatives market and effective and diverse hedging tool,while there is a large demand for weather derivatives.To this end,China is making a lot of efforts to develop the market,so that the finance can better serve the real economy such as agriculture,and protect it more stable and healthier.The pricing is the core of establishmented weather derivatives market.If the pricing cannot be effectively solved,the market cannot play its functions of hedging and price discovery.Therefore,it is of great significance to study the pricing of weather derivatives.This paper focuses on the pricing of temperature derivatives,and uses the Markov regime-switching model to construct the temperature dynamics process.Based on this model,the risk-neutral pricing of CAT,HDD and CDD index future and option contracts are studied.Because the analytical solution of the equation cannot be obtained,and the weather derivatives market does not have the spot market which it is an incomplete market,this paper uses Monte Carlo simulation to analyze the pricing of European options.The cities with Beijing,Shanghai,Guangzhou,Wuhan and Harbin as the contracted cities found that the Markov regimeswitching model can well fit the dynamic changes of temperature,and the price of European call options in these five cities is given by Monte Carlo simulation.