OPTION-BASED TEMPERATURE DERIVATIVES AS THE INSTRUMENTS FOR ELIMINATION OF WEATHER RISK IMPACT
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The derivative instruments are widely accepted tools in hedging against the market risks. However, they can be used for elimination of impacts of the non-market risks as well. Weather derivatives, like other Arrow-Debreu instruments (Jaimungal, 2004) provide specific payouts in the case of occurrence of the weather risk events (e.g. temperature and precipitations). Dissimilarity of such risks even in very close areas and inability to settle them directly by delivery of underlying, makes the effective application of such derivatives dependent both on of the analytical model and on availability of the relevant empirical data as well. This paper is focused on certain issues in application of option-based temperature derivatives.
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