Abstract
Pricing formulas for components of a portfolio of temperature-based weather derivatives, as well as the corresponding hedging formula, are derived using the recent general theory of neutral and indifference pricing and hedging in incomplete markets. The derived pricing formulas have the flexibility to account for the total exposure, i.e., for the number of weather derivatives contracts held. In particular, we obtain a structural form for the market price of risk (the risk premium).
| Original language | English |
|---|---|
| Pages (from-to) | 75-98 |
| Number of pages | 24 |
| Journal | Risk and Decision Analysis |
| Volume | 5 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 2014 |
| Externally published | Yes |
UN SDGs
This output contributes to the following UN Sustainable Development Goals (SDGs)
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SDG 8 Decent Work and Economic Growth
Keywords
- cumulative average temperatures
- hedging
- indifference pricing
- Neutral pricing
- portfolios of weather derivatives
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