A Study of Pricing Weather Options in Taiwan
Date Issued
2006
Date
2006
Author(s)
Peng, Ju-Min
DOI
zh-TW
Abstract
Weather options were created in 1997 and given to power companies the tools to avoid weather risk. By studying key papers, we found that setting on HDD/CDD indices options pricing model is needed to choose temperature as underlying asset, have stochastic processes of mean-reverting, and consider long-term trend and short-term volatility of temperature.
This study try to calculate the fair option prices. CDD index is the object of study.and we choose twenty years historical data of average temperature from 1986 to 2005. The set of evaluation model chooses temperature as underlying asset, and stochastic processes of mean reversion. Besides, long-tern and short-term volatility need to be considered at the same time. By Monte Carlo Simulations, to simulate expected payoff of underlying asset on expiration date 10000 times, and then discount them through risk-free interest to gain fair price of weather option. Based on the three temperature standards-18℃, 20℃, and 23℃, this study simulates each the option price of each target city to provide different information for reference. In each target city, we found that Taipei and Kaohsiung choose twenty years historical data as suitable period. Inversely, Taichung chooses ten years historical data as suitable period. Additionally, by sensitivity analysis we find that 23℃ is the most optimal standard based on the three temperature standards.
Subjects
HDD/CDD指數
氣候衍生性金融商品
氣候選擇權
HDD/CDD indices
weather derivatives
weather options
Type
thesis
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