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Modelling Environment Changes for Pricing Weather Derivatives

Author

Listed:
  • Kabaivanov Stanimir

    (University of Plovdiv Paisii Hilendarski, Plovdiv, Bulgaria)

  • Markovska Veneta

    (University of Food Technologies, Plovdiv, Bulgaria)

Abstract

This paper focuses on modelling environment changes in a way that allows to price weather derivatives in a flexible and efficient way. Applications and importance of climate and weather contracts extends beyond financial markets and hedging as they can be used as complementary tools for risk assessment. In addition, option-based approach toward resource management can offer very special insights on rare-events and allow to reuse derivative pricing methods to improve natural resources management. To demonstrate this general concept, we use Monte Carlo and stochastic modelling of temperatures to evaluate weather options. Research results are accompanied by R and Python code.

Suggested Citation

  • Kabaivanov Stanimir & Markovska Veneta, 2017. "Modelling Environment Changes for Pricing Weather Derivatives," Scientific Annals of Economics and Business, Sciendo, vol. 64(4), pages 423-430, December.
    • Handle: RePEc:vrs:aicuec:v:64:y:2017:i:4:p:423-430:n:6
    DOI: 10.1515/saeb-2017-0031
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    More about this item

    Keywords

    weather derivatives; temperature modelling; Monte Carlo;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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