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Dynamic valuation of weather derivatives under default risk

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  • Härdle, Wolfgang Karl
  • Osipenko, Maria

Abstract

Weather derivatives are contingent claims with payo based on a pre-speci ed weather index. Firms exposed to weather risk can transfer it to nancial markets via weather derivatives. We develop a utility-based model for pricing baskets of weather derivatives in over-the-counter markets under counterparty default risk. In our model, agents maximise the expected utility of their terminal wealth, while they dynamically rebalance their weather portfolios over a nite investment horizon. Via partial market clearing, we obtain semi-closed forms for the equilibrium prices of weather derivatives and for the optimal strategies of the agents. We give an example on how to price rainfall derivatives on selected stations in China in the universe of a nancial investor and a weather exposed crop insurer.

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  • Härdle, Wolfgang Karl & Osipenko, Maria, 2017. "Dynamic valuation of weather derivatives under default risk," SFB 649 Discussion Papers 2017-005, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2017-005
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    1. Wolfgang Karl Härdle & Brenda López Cabrera & Awdesch Melzer, 2021. "Pricing wind power futures," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 70(4), pages 1083-1102, August.

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