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Modeling and pricing of space weather derivatives

Author

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  • Birgit Lemmerer

    (University of Graz)

  • Stephan Unger

    (Saint Anselm College)

Abstract

This article proposes a pricing model for space weather derivatives with payout depending on solar activity. By measuring the disturbance of the Earth’s magnetosphere, it is possible to price space weather derivatives which trigger a payoff if a certain level of energization is reached. Since energetic particles emitted by the Sun are a non-tradeable quantity, unique prices of contracts in an incomplete market are obtained using inverse transformation sampling as well as the market price of risk. We find a step-wise decline of option prices with increasing barriers of Kp-index values, a dependence of the option prices on the sunspot cycle, as well as reduced sensitivity of longer-dated maturities for higher Kp-index values.

Suggested Citation

  • Birgit Lemmerer & Stephan Unger, 2019. "Modeling and pricing of space weather derivatives," Risk Management, Palgrave Macmillan, vol. 21(4), pages 265-291, December.
    • Handle: RePEc:pal:risman:v:21:y:2019:i:4:d:10.1057_s41283-019-00052-0
    DOI: 10.1057/s41283-019-00052-0
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    References listed on IDEAS

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    1. Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2004. "Pricing Weather Derivatives," Working Papers 28536, Arizona State University, Morrison School of Agribusiness and Resource Management.
    2. Jewson,Stephen & Brix,Anders With contributions by-Name:Ziehmann,Christine, 2005. "Weather Derivative Valuation," Cambridge Books, Cambridge University Press, number 9780521843713.
    3. Peter Alaton & Boualem Djehiche & David Stillberger, 2002. "On modelling and pricing weather derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(1), pages 1-20.
    4. Dorje Brody & Joanna Syroka & Mihail Zervos, 2002. "Dynamical pricing of weather derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 2(3), pages 189-198.
    5. M. Davis, 2001. "Pricing weather derivatives by marginal value," Quantitative Finance, Taylor & Francis Journals, vol. 1(3), pages 305-308, March.
    6. Dwight R. Sanders, 2004. "Pricing Weather Derivatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 1005-1017.
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    Cited by:

    1. Stephan Unger, 2019. "The Impact of Space Weather on Human Health," Biomedical Journal of Scientific & Technical Research, Biomedical Research Network+, LLC, vol. 22(1), pages 16442-16443, October.

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