Pricing Weather Derivatives

The impact of the weather on everyday life is well documented. Businesses must hedge this impact. Faced with increased market deregulation, competition for business is keener than ever, hence businesses can no longer just transfer the burden of falling revenues to consumers. In this thesis, we study weather derivatives. These are a set of financial instruments that are becoming increasingly popular and widely used in industry. We discuss their anatomy and their importance as a weather risk management tool. We focus our study on degree day options, weather options whose underlying is the temperature. We thus develop a stochastic temperature model which we use to price these options. We compare the results our model yields with historical option payouts. We also use bond pricing techniques to calculate the expected temperature, which we compare with the mean of the temperature obtained from our model. We find that our model gives reasonable results for the degree day options we seek to price.

Name thesis:degree_name

Master of Science

Discipline thesis:degree_discipline

Applied Mathematics

Grantor dc:publisher

The University of Western Ontario

Year dc:date.issued

2003

Author dc:creator

• Bah, Abu Bakar

Advisor dc:contributor.advisor

• Davison, Matt

Language dc:language.iso

en

Handle dc:identifier.uri

https://hdl.handle.net/20.500.14721/39058

OAI identifier oai:identifier

oai:uwo.scholaris.ca:20.500.14721/39058