Influence of Hedging Cost upon Weather Derivatives Pricing

Teng Lei

doi:doi:10.11648/j.jfa.20160404.19

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Influence of Hedging Cost upon Weather Derivatives Pricing

Teng Lei

Published in Journal of Finance and Accounting (Volume 4, Issue 4)

Received: 24 January 2016 Accepted: 29 February 2016 Published: 2 August 2016

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Abstract

Weather derivatives play a major role in risk management of non-catastrophic weather market. The healthy development of the derivatives market is inseparable from the reasonable pricing of the product itself. As non-traditional financial derivatives, weather derivatives can provide a good risk hedging. Meanwhile, in the weather derivatives market, brokers play an even more important part than in the traditional financial derivatives market. Therefore, when pricing weather derivatives, we must take two factors into consideration, namely, brokers as market makers as well as the impact of their hedging cost on weather derivatives pricing. Based on the expected claims and risk payment of basic derivatives contracts, this paper is going to discuss weather derivatives pricing on the basis of hedging costs, while taking into account the impact of market makers’ hedging costs, risk aversion and existing positions.

Published in	Journal of Finance and Accounting (Volume 4, Issue 4)
DOI	10.11648/j.jfa.20160404.19
Page(s)	234-238
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Weather Derivatives, Hedging, Market Makers

References

[1]	Liu Yuanyuan Rethinking weather derivative products and financial derivatives function [J] International Financial Research, 2005 (8): 53-56.
[2]	Chen Jing weather futures development and application in China [J] Shanghai Financial, 2004 (12): 10-13.
[3]	Guo Shuhua Lu Xiaolong development, application and prospects of weather derivatives product research [3], [J] Economist, 2008 (2): 68-69.
[4]	Eric Banks weather risk management: markets, products and applications [M] // Li Guohua Beijing: Economic Management Press, 2011: 177-182.
[5]	Liu Guoguang- weather forecasts and weather derivatives pricing research, [J] 2006 (6): 28-33.
[6]	Liu Guoguang, Mao Ning stochastic model of the temperature and the temperature of option Pricing [J] Mathematical Statistics and Management, 2008 (6): 959-967.
[7]	LEE, Min Xia, Liang Liming weather derivatives OU Pricing Model - A Case Study in temperatures forecast options, 2012 (2), 18-37.
[8]	Xie Shiqing, Meiyun Yun weather derivatives operation mechanism and Actuarial Pricing: Theory and Practice of Finance and Economics. 2011 (6), 39-43.
[9]	Chen Baishuo, Lishou Wei, He Jianmin, Cao Jie. Temperature Prediction Model of weather derivatives in varying mean reversion. Management Engineering. 2014 (2), 145-150.
[10]	Debbie J, Dupuis. Forecasting temperature to price CME temperature derivatives. [J] International Journal of Forecasting, 27 (2011): 602-618.
[11]	Zapranis A, Alexandridis A. Modeling the temperature time-dependent speed of mean reversion in the context of weather derivatives [J]. Applied Mathematical Finance, 2008, 15 (4): 355-386.

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APA Style

Teng Lei. (2016). Influence of Hedging Cost upon Weather Derivatives Pricing. Journal of Finance and Accounting, 4(4), 234-238. https://doi.org/10.11648/j.jfa.20160404.19

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ACS Style

Teng Lei. Influence of Hedging Cost upon Weather Derivatives Pricing. J. Finance Account. 2016, 4(4), 234-238. doi: 10.11648/j.jfa.20160404.19

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AMA Style

Teng Lei. Influence of Hedging Cost upon Weather Derivatives Pricing. J Finance Account. 2016;4(4):234-238. doi: 10.11648/j.jfa.20160404.19

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@article{10.11648/j.jfa.20160404.19,
  author = {Teng Lei},
  title = {Influence of Hedging Cost upon Weather Derivatives Pricing},
  journal = {Journal of Finance and Accounting},
  volume = {4},
  number = {4},
  pages = {234-238},
  doi = {10.11648/j.jfa.20160404.19},
  url = {https://doi.org/10.11648/j.jfa.20160404.19},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20160404.19},
  abstract = {Weather derivatives play a major role in risk management of non-catastrophic weather market. The healthy development of the derivatives market is inseparable from the reasonable pricing of the product itself. As non-traditional financial derivatives, weather derivatives can provide a good risk hedging. Meanwhile, in the weather derivatives market, brokers play an even more important part than in the traditional financial derivatives market. Therefore, when pricing weather derivatives, we must take two factors into consideration, namely, brokers as market makers as well as the impact of their hedging cost on weather derivatives pricing. Based on the expected claims and risk payment of basic derivatives contracts, this paper is going to discuss weather derivatives pricing on the basis of hedging costs, while taking into account the impact of market makers’ hedging costs, risk aversion and existing positions.},
 year = {2016}
}

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TY  - JOUR
T1  - Influence of Hedging Cost upon Weather Derivatives Pricing
AU  - Teng Lei
Y1  - 2016/08/02
PY  - 2016
N1  - https://doi.org/10.11648/j.jfa.20160404.19
DO  - 10.11648/j.jfa.20160404.19
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 234
EP  - 238
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20160404.19
AB  - Weather derivatives play a major role in risk management of non-catastrophic weather market. The healthy development of the derivatives market is inseparable from the reasonable pricing of the product itself. As non-traditional financial derivatives, weather derivatives can provide a good risk hedging. Meanwhile, in the weather derivatives market, brokers play an even more important part than in the traditional financial derivatives market. Therefore, when pricing weather derivatives, we must take two factors into consideration, namely, brokers as market makers as well as the impact of their hedging cost on weather derivatives pricing. Based on the expected claims and risk payment of basic derivatives contracts, this paper is going to discuss weather derivatives pricing on the basis of hedging costs, while taking into account the impact of market makers’ hedging costs, risk aversion and existing positions.
VL  - 4
IS  - 4
ER  -

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Author Information

Teng Lei

Business School, Chengdu University of Information Technology, Chengdu, China

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APA Style

Teng Lei. (2016). Influence of Hedging Cost upon Weather Derivatives Pricing. Journal of Finance and Accounting, 4(4), 234-238. https://doi.org/10.11648/j.jfa.20160404.19

Copy | Download

ACS Style

Teng Lei. Influence of Hedging Cost upon Weather Derivatives Pricing. J. Finance Account. 2016, 4(4), 234-238. doi: 10.11648/j.jfa.20160404.19

Copy | Download

AMA Style

Teng Lei. Influence of Hedging Cost upon Weather Derivatives Pricing. J Finance Account. 2016;4(4):234-238. doi: 10.11648/j.jfa.20160404.19

Copy | Download

@article{10.11648/j.jfa.20160404.19,
  author = {Teng Lei},
  title = {Influence of Hedging Cost upon Weather Derivatives Pricing},
  journal = {Journal of Finance and Accounting},
  volume = {4},
  number = {4},
  pages = {234-238},
  doi = {10.11648/j.jfa.20160404.19},
  url = {https://doi.org/10.11648/j.jfa.20160404.19},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20160404.19},
  abstract = {Weather derivatives play a major role in risk management of non-catastrophic weather market. The healthy development of the derivatives market is inseparable from the reasonable pricing of the product itself. As non-traditional financial derivatives, weather derivatives can provide a good risk hedging. Meanwhile, in the weather derivatives market, brokers play an even more important part than in the traditional financial derivatives market. Therefore, when pricing weather derivatives, we must take two factors into consideration, namely, brokers as market makers as well as the impact of their hedging cost on weather derivatives pricing. Based on the expected claims and risk payment of basic derivatives contracts, this paper is going to discuss weather derivatives pricing on the basis of hedging costs, while taking into account the impact of market makers’ hedging costs, risk aversion and existing positions.},
 year = {2016}
}

Copy | Download

TY  - JOUR
T1  - Influence of Hedging Cost upon Weather Derivatives Pricing
AU  - Teng Lei
Y1  - 2016/08/02
PY  - 2016
N1  - https://doi.org/10.11648/j.jfa.20160404.19
DO  - 10.11648/j.jfa.20160404.19
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 234
EP  - 238
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20160404.19
AB  - Weather derivatives play a major role in risk management of non-catastrophic weather market. The healthy development of the derivatives market is inseparable from the reasonable pricing of the product itself. As non-traditional financial derivatives, weather derivatives can provide a good risk hedging. Meanwhile, in the weather derivatives market, brokers play an even more important part than in the traditional financial derivatives market. Therefore, when pricing weather derivatives, we must take two factors into consideration, namely, brokers as market makers as well as the impact of their hedging cost on weather derivatives pricing. Based on the expected claims and risk payment of basic derivatives contracts, this paper is going to discuss weather derivatives pricing on the basis of hedging costs, while taking into account the impact of market makers’ hedging costs, risk aversion and existing positions.
VL  - 4
IS  - 4
ER  -

Copy | Download