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Pricing of temperature-based weather options for Turkey

Listed author(s):
  • Ahmet GÖNCÜ

    (Shandong University)

  • Mehmet Oguz KARAHAN

    (Bogazici Universitesi)

  • Tolga Umut KUZUBAŞ

    (Bogazici Universitesi)

Weather derivatives provide better risk management alternatives for industries, which are exposed to weather-based risks. Dynamic pricing of weather derivatives requires a suitable underlying temperature model. This paper is the first to model the average daily temperatures and prices of heating/cooling degree days (HDD/CDD) option contracts for Istanbul, Turkey. We model daily average temperatures using the mean-reverting Ornstein-Uhlenbeck (OU) process both with constant and time-varying mean reversion parameters. HDD/CDD options for Istanbul are priced using analytical approximation and Monte Carlo simulations. In most cases estimates are lower when time-varying mean reversion model is used. We also discuss several issues on the importance of weather derivatives markets for developing countries.

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Article provided by Bilgesel Yayincilik in its journal İktisat İşletme ve Finans.

Volume (Year): 26 (2011)
Issue (Month): 309 ()
Pages: 33-50

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Handle: RePEc:iif:iifjrn:v:26:y:2011:i:309:p:33-50
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