Design Of Temperature Index Futures Contract

Weather risk refers to the uncertainty of the outcome of future economic events due to changes in weather.According to the difference between the degree of impact and the frequency of occurrence,it can be divided into catastrophic and general weather risk.In the world,weather risk has a great impact on many industries.Energy,agriculture,retail and tourism industries are more sensitive to weather.In 1997,the first over-the-counter trading of weather derivative in the world was completed in the United States.In 1999,the first weather derivative was listed on the Chicago Mercantile Exchange.Since then,weather derivative market has been booming.At present,weather derivative with the largest trading volume and highest active degree is the derivative based on temperature index.China is very sensitive to weather changes.It is urgent to manage weather risk effectively in order to eliminate adverse impacts.Located in an important area around the Bohai Sea,the Beijing-Tianjin-Hebei region is the largest and most dynamic region in the north of China.In recent years,China has focused on promoting the coordinated development of Beijing-Tianjin-Hebei region.The central core functional area of Beijing-Tianjin-Hebei region includes Beijing,Tianjin,Baoding and Langfang,focusing on the relocation of non-capital function from Beijing and striving to take the lead in the coordinated development of Beijing-Tianjin-Baoding region.Therefore,in view of current market condition,temperature index futures based on the Beijing-Tianjin-Hebei region have great development prospects.The paper takes the central core functional area of Beijing-Tianjin-Hebei region as the research object,designs the contract elements of the temperature index futures and price the contract in order to contribute to the development of weather derivatives market in China.Firstly,referring to the temperature index futures contract traded on the Chicago Mercantile Exchange and combining with the actual situation in China,the paper designs contract elements of the temperature index futures contract,including the underlying index,trading mode,underlying city,contract month,etc.Secondly,through the statistical analysis of daily average temperature data from 2000 to 2019 in the central core functional area of BeijingTianjin-Hebei region,the temperature series is divided into seasonal component and random component.Regress the seasonal component by establishing a sine function of time.And build ARMA model to fit the random component.After model modification and parameter estimation,the temperature prediction model is constructed.The accuracy of model is tested by using the temperature data in 2020.Then take the temperature prediction model as the simulation path,use MATLAB software,and use Monte Carlo simulation method to price the heating index futures and the cooling index futures.Thirdly,the paper analyzes the application value and risks of the temperature index futures in the energy,agriculture,retail and tourism industries.Through two examples,the significant role of temperature index futures in weather risk management is analyzed.Finally,based on the actual situation in China,some suggestions are put forward for the development and promotion of weather derivatives.