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Weather Derivatives and Weather Risk Management

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  • Patrick L. Brockett
  • Mulong Wang
  • Chuanhou Yang

Abstract

Weather derivatives are a relatively recent kind of financial product developed to manage weather risks, and currently the weather derivatives market is the fastest‐growing derivative market. The development of weather derivatives represents one of the recent trends toward the convergence of insurance and finance. This article presents an overview of weather risks, weather derivatives, and the weather derivatives market, and examines the valuation of weather derivatives in an incomplete market, the hedging effectiveness of standardized weather derivatives, as well as optimal weather hedging with the consideration of basis risk and credit risk.

Suggested Citation

  • Patrick L. Brockett & Mulong Wang & Chuanhou Yang, 2005. "Weather Derivatives and Weather Risk Management," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 8(1), pages 127-140, March.
    • Handle: RePEc:bla:rmgtin:v:8:y:2005:i:1:p:127-140
    DOI: j.1540-6296.2005.00052.x
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