IDEAS home Printed from https://ideas.repec.org/a/ids/ijfmkd/v2y2011i4p298-313.html
   My bibliography  Save this article

Can we use the Black-Scholes-Merton model to value temperature options?

Author

Listed:
  • Gunter Meissner
  • James Burke

Abstract

In 1973, Fisher Black, Myron Scholes and separately Robert Merton derived the Black-Scholes-Merton (BSM) model, which was rewarded the Nobel Prize in 1997. Despite its limitations, the model has survived until today as the dominant pricing model for standard and exotic European style options. The model owes its success to its simplicity, high intuition and versatility. Burn analysis, which is typically applied in practise to price temperature options, lacks a rigorous mathematical foundation and can lead to arbitrage opportunities. We find that the BSM model despite its limitations is an adequate pricing model, which is superior to Burn analysis.

Suggested Citation

  • Gunter Meissner & James Burke, 2011. "Can we use the Black-Scholes-Merton model to value temperature options?," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 2(4), pages 298-313.
    • Handle: RePEc:ids:ijfmkd:v:2:y:2011:i:4:p:298-313
    as

    Download full text from publisher

    File URL: http://www.inderscience.com/link.php?id=45601
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yeny E. Rodríguez & Miguel A. Pérez-Uribe & Javier Contreras, 2021. "Wind Put Barrier Options Pricing Based on the Nordix Index," Energies, MDPI, vol. 14(4), pages 1-14, February.
    2. Yuji Yamada & Takuji Matsumoto, 2021. "Going for Derivatives or Forwards? Minimizing Cashflow Fluctuations of Electricity Transactions on Power Markets," Energies, MDPI, vol. 14(21), pages 1-28, November.
    3. Andrea Martínez Salgueiro & Maria-Antonia Tarrazon-Rodon, 2021. "Weather derivatives to mitigate meteorological risks in tourism management: An empirical application to celebrations of Comunidad Valenciana (Spain)," Tourism Economics, , vol. 27(4), pages 591-613, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ids:ijfmkd:v:2:y:2011:i:4:p:298-313. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sarah Parker (email available below). General contact details of provider: http://www.inderscience.com/browse/index.php?journalID=307 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.