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Options on temperature and wind

In: Modeling and Pricing in Financial Markets for Weather Derivatives

Author

Listed:
  • Fred Espen Benth

    (University of Oslo, Norway)

  • Jūratė Šaltytė Benth

    (University of Oslo, Norway)

Abstract

In this chapter we price and hedge options written on weather forward contracts. We investigate European call and put options on temperature and wind forwards. Options on temperature forwards are offered for trade at the CME, while wind forward options were introduced but the US Futures Exchange was closed. A novel aspect of weather markets, namely the possibility to hedge weather risk playing on the spatial dependency of weather factors, is introduced in this Chapter. We call it geographical hedging. Geographical hedging implies using weather contracts at various locations to hedge the weather risk at a given adjacent location.

Suggested Citation

  • Fred Espen Benth & Jūratė Šaltytė Benth, 2012. "Options on temperature and wind," World Scientific Book Chapters, in: Modeling and Pricing in Financial Markets for Weather Derivatives, chapter 7, pages 157-177, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814401852_0007
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