Pricing temperature-based weather contracts: an application toChina
Forthcoming on Applied Economics Letters
Accepted onNovember 1st, 2010
This paper is the first study to price temperature-based weather derivatives based on the daily average temperatures of Chinese cities, namelyBeijing,Shanghai, and Shenzhen. The dynamic model with the piecewise constant volatility function, which is proposed by Alaton et al. (2002), is used for pricing heating degree days and cooling degree days options. Price estimates for these options are obtained usingMonte Carlosimulation and analytical approximation methods.