Pricing Weather Derivatives

Abstract

ABSTRACT Weather makes influence on our daily lives and choices and has substantial impact on corporate revenues and earnings. The impact of weather on business activities is significant and varies both geographically and seasonally. Almost every industry is affected by the weather, among which is agriculture, energy, entertainment, travel, constructions. It is been stated that "weather is not just an environmental issue; it is major economic factor". Weather risk is localized, and cannot be controlled. Despite advances in meteorological science, weather still cannot be predicted precisely and consistently. As a tool for managing weather risk, special kind of derivative securities was established - weather derivatives. Opportunity to trade on weather posed challenge for financial and risk management professionals; which include pricing analysis, and portfolio management. Market for these securities is incomplete market, because the underlying security (weather) is not tradable asset. The aim of this dissertation is to address the problem of pricing weather derivative securities and create a model that can be used for valuation of such securities written on Paris