The pricing of degree-day weather options
AbstractThis paper presents a model and framework for pricing degree-day weather derivatives when the weather variable is a non-traded asset. Using daily weather data from 1840S1996, it is shown that a degree-day weather index exhibits stable volatility and satisfies the random walk hypothesis. The options prices from the recommended model are compared to a typical insurance-type model. The results show that the insurance model overprices the option value at-the-money, and this may explain why the bid-ask spread in the weather derivatives market is sometimes very large.
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Bibliographic InfoArticle provided by Emerald Group Publishing in its journal Agricultural Finance Review.
Volume (Year): 65 (2005)
Issue (Month): 1 (May)
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- Rong Kong & Calum G. Turvey & Guangwen He & Jiujie Ma & Patrick Meagher, 2011. "Factors influencing Shaanxi and Gansu farmers' willingness to purchase weather insurance," China Agricultural Economic Review, Emerald Group Publishing, vol. 3(4), pages 423-440, November.
- repec:ags:nc2006:133091 is not listed on IDEAS
- Leif Erec Heimfarth & Oliver Musshoff, 2011. "Weather index-based insurances for farmers in the North China Plain: An analysis of risk reduction potential and basis risk," Agricultural Finance Review, Emerald Group Publishing, vol. 71(2), pages 218-239, July.
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- Hotopp, Henning & MuÃŸhoff, Oliver, 2012. "Can rent adjustment clauses reduce the income risk of farms?," International Journal of Agricultural Management, Institute of Agricultural Management;International Farm Management Association, vol. 1(4), July.
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