Weather derivatives valuation and market price of weather risk

2004 ◽  
Vol 24 (11) ◽  
pp. 1065-1089 ◽  
Author(s):  
Melanie Cao ◽  
Jason Wei
Keyword(s):  
Market Price ◽  
Weather Derivatives ◽  
Weather Risk

A Study on the Market Price of Weather Risk in Pricing Weather Derivatives

2009 ◽  
Vol 17 (2) ◽  
pp. 49-66
Author(s):  
Kwang-Il Bae ◽  
Jin Hee Choung
Keyword(s):  
New York ◽  
Interest Rates ◽  
Market Price ◽  
Option Price ◽  
Simulation Method ◽  
Weather Derivatives ◽  
Market Prices ◽  
Weather Risk ◽  
Option Pricing Model ◽  
Weather Changes

The weather largely affects economic activity, and thus, companies vulnerable to weather risk need to plan ahead to cope with unexpected weather changes, just as they do for changes in interest rates, oil prices, or foreign exchange rates to stabilize their earning stream. Weather derivatives can be a useful tool for weather risk management. This paper focuses on pricing one of the most popular weather derivatives -HDD/CDD options- and estimating the market price of weather risk (MPR). Historical data are used to construct the stochastic process of temperature, while the current market prices of Chicago and New York HDD futures options are used to extract the implied MPR. The Monte-Carlo Simulation Method is proposed to estimate the price of weather derivatives numerically. In addition, the approximate closed form formula for the options is provided modifying the Alaton, Djehiche, and Stillberg (2002) model. Finally, option price sensitivity to changes in MPR is analyzed to show the important role of the MPR in the weather option pricing model.

scholarly journals Implied Market Price of Weather Risk

2009 ◽  
Author(s):  
Wolfgang K. HHrdle ◽  
Brenda LLpez Cabrera
Keyword(s):  
Market Price ◽  
Weather Risk

scholarly journals Weather Risk Management in Energy Sector: The Polish Case

Energies ◽  
2020 ◽  
Vol 13 (4) ◽  
pp. 945
Author(s):  
Monika Wieczorek-Kosmala
Keyword(s):  
Risk Management ◽  
Energy Sector ◽  
Annual Reports ◽  
Research Approach ◽  
Weather Derivatives ◽  
Weather Risk ◽  
The Cost ◽  
Energy Companies ◽  
Weather Risk Management ◽  
The Impact

The energy sector is perceived as one of the most exposed sectors to the consequences of weather risk both directly (damages of its infrastructure) and indirectly (frictions to the energy supply–demand balance). The main aim of this paper is to provide an insight into the impact of weather risk on economic activity of companies operating in the energy sector in Poland. The empirical objective is to examine whether energy companies: (i) identify their relevant weather risk exposures; (ii) evaluate the impact of weather risk in the cost-revenues dimension; and (iii) implement weather risk management tools, in this case—weather derivatives. In a methodical context, this study relies on a unique research approach and derives from works that examine companies’ risk disclosures in annual reports, by applying textual content analysis. The results indicate that Polish energy companies recognize the impact of weather risk on their performance, also in the cost-revenues dimension. However, although the reported weather risk management methods were diversified, the examined companies did not use weather derivatives to hedge their weather risk exposures. In the overall dimension, the companies leading with the perception and management of weather risk were diversified regarding performance and market size.

scholarly journals The Implied Market Price of Weather Risk

2012 ◽  
Vol 19 (1) ◽  
pp. 59-95 ◽  
Author(s):  
Wolfgang Karl Härdle ◽  
Brenda López Cabrera
Keyword(s):  
Market Price ◽  
Weather Risk

Weather Derivatives and Weather Risk Management

2005 ◽  
Vol 8 (1) ◽  
pp. 127-140 ◽  
Author(s):  
Patrick L. Brockett ◽  
Mulong Wang ◽  
Chuanhou Yang
Keyword(s):  
Risk Management ◽  
Weather Derivatives ◽  
Weather Risk ◽  
Weather Risk Management

Contracting with Controllable Risk

2021 ◽  
Author(s):  
Christopher S. Armstrong ◽  
Stephen Glaeser ◽  
Sterling Huang
Keyword(s):  
Experimental Evidence ◽  
Risk Premium ◽  
Incentive Compensation ◽  
Weather Derivatives ◽  
Total Compensation ◽  
Compensation Contracts ◽  
Equity Incentives ◽  
Weather Risk

We examine how executives' ability to control their firm's exposure to risk affects the design of their incentive-compensation contracts. Our natural experimental evidence shows that exchange-traded weather derivatives allow executives to control their firm's exposure to weather risk. Once these derivatives became available those executives who use them to hedge experience relative reductions in their total compensation and equity incentives. The decline in compensation is consistent with a reduction in the risk premium that executives receive for exposure to weather risk. The decline in equity incentives is consistent with the relation between risk and incentives shifting in a complementary direction when executives can better control their firm's exposure to risk. Collectively, our findings provide evidence that executives' ability to control their firms' exposure, and by extension their own, to an important source of risk influences the design of their incentive-compensation contracts.

scholarly journals Effectiveness of weather derivatives as a hedge against the weather risk in agriculture

2016 ◽  
Vol 62 (No. 8) ◽  
pp. 356-362 ◽  
Author(s):  
Stulec Ivana ◽  
Petljak Kristina ◽  
Bakovic Tomislav
Keyword(s):  
Climate Change ◽  
Risk Management ◽  
Management Tool ◽  
Weather Derivatives ◽  
Economic Sectors ◽  
Weather Risk ◽  
Flexible Management ◽  
Weather Risk Management ◽  
Catastrophic Impact

Weather affects the economies worldwide and all economic sectors are to some extent weather sensitive. Agriculture is traditionally highly weather sensitive. While the catastrophic impact of weather has been long recognized, studied and managed the non-catastrophic weather risk gains in importance as the climate change becomes more pronounced. Weather derivatives provide a flexible management solution for the non-catastrophic weather risk. The paper presents weather derivatives as a new weather risk management tool and reviews and discusses the effectiveness of their application in agriculture

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