Approaching rainfall-based weather derivatives pricing and operational challenges

Salgueiro, Andrea Martínez; Tarrazon-Rodon, Maria-Antonia

doi:10.1007/s11147-019-09161-0

Cited by 6 publications

(3 citation statements)

References 35 publications

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“…In fact, Table 8 presents that either taking Valencia, Castellon, or Alicante as reference station, this alternative yields lower RMSE values for all the strike levels considered, with reductions of up to 110, 68, and 51 units, respectively, in comparison with the less favorable alternative. These outcomes are in line with preceding findings reported in the work of Martínez Salgueiro and Tarrazon-Rodon (2019), which also favor the implementation of compound derivatives geared to rainfall for the months of September and October in Comunidad Valenciana.…”

Section: Resultssupporting

confidence: 91%

“…The alternative Daily Simulation technique is not used in this case as it entails the important dangers of specifying the daily precipitation model incorrectly and, therefore, of underestimating rainfall volatility (Cao et al, 2004: 98; Odening et al, 2007: 152). The Index Value Simulation method, already applied in the work of Leobacher and Ngare (2011), Shah (2017), and Martínez Salgueiro and Tarrazon-Rodon (2019), is implemented in this article by modeling the monthly cumulative rainfall index through a parametric distribution.…”

Section: Methodsmentioning

confidence: 99%

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Weather derivatives to mitigate meteorological risks in tourism management: An empirical application to celebrations of Comunidad Valenciana (Spain)

Salgueiro

Tarrazon-Rodon

2019

Tourism Economics

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This article explores the possibility of implementing weather derivatives in cultural events through an empirical application to celebrations of Comunidad Valenciana (Spain). Temperature- and rainfall-based options geared to the three counties of this Autonomous Community are proposed to mitigate the risk exposure of this event. First, the contracts are priced through the Index Value Simulation and Daily Simulation techniques, which rely on Monte Carlo simulations. Next, they are used to design realistic hedging strategies, which are evaluated under different meteorological scenarios. The degree of geographical basis risk affecting this region, as measured by the root mean square error, is also assessed since it is a common issue refraining the application of weather derivatives. The outcomes attained emphasize the high hedging potential of the suggested tools and indicate the appropriateness of considering, on a case-by-case basis, the possibility of using a combination of derivatives geared to nearby stations as a solution to mitigate basis risk exposure.

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Section: Resultssupporting

confidence: 91%

Section: Methodsmentioning

confidence: 99%

Weather derivatives to mitigate meteorological risks in tourism management: An empirical application to celebrations of Comunidad Valenciana (Spain)

Salgueiro

Tarrazon-Rodon

2019

Tourism Economics

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“…It is important to note that weather derivative pricing does not use the Black-Scholes model [37][38][39]. According to Botoş and Ciumaş [39], some of the reasons why the Black-Scholes model is not suitable for the valuation of weather derivatives are (1) the underlying asset (rain, precipitation, wind speed) has no direct value to the price of derivative, and it is not standard tradable, so its price cannot be free of financial risks; (2) the evolution of the weather is determined by meteorological and geological factors, which makes the variable take certain values inside narrow intervals; and (3) weather does not exhibit the random nature of financial assets, and its inherent nature makes it predictable in the short term and makes it random around historical averages in the long term.…”

Section: Barrier Options Based On Weather Indexesmentioning

confidence: 99%

Wind Put Barrier Options Pricing Based on the Nordix Index

2021

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Wind power generators face risks derived from fluctuations in market prices and variability in power production, generated by their high dependence on wind speed. These risks could be hedged using weather financial instruments. In this research, we design and price an up-and-in European wind put barrier option using Monte Carlo simulation. Under the existence of a structured weather market, wind producers may purchase an up-and-in European wind barrier put option to hedge wind fluctuations, allowing them to recover their investments and maximise their profits. We use a wind speed index as the underlying index of the barrier option, which captures risk from wind power generation and the Autoregressive Fractionally Integrated Moving Average (ARFIMA) to model the wind speed. This methodology is applied in the Colombian context, an electricity market affected by the El Niño phenomenon. We find that when the El Niño phenomenon occurs, there are incentives for wind generators to sell their energy to the system because their costs, including the put option price, are lower than the power prices. This research aims at encouraging policymakers and governments to promote renewable energy sources and a financial market to trade options to reduce uncertainty in the electrical system due to climate phenomena.

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Design of Temperature Insurance Index and Risk Zonation for Single-Season Rice in Response to High-Temperature and Low-Temperature Damage: A Case Study of Jiangsu Province, China

Wu¹,

Guo²

2021

Economic Impacts and Emergency Management of Disasters in China

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Approaching rainfall-based weather derivatives pricing and operational challenges

Cited by 6 publications

References 35 publications

Weather derivatives to mitigate meteorological risks in tourism management: An empirical application to celebrations of Comunidad Valenciana (Spain)

Weather derivatives to mitigate meteorological risks in tourism management: An empirical application to celebrations of Comunidad Valenciana (Spain)

Wind Put Barrier Options Pricing Based on the Nordix Index

Design of Temperature Insurance Index and Risk Zonation for Single-Season Rice in Response to High-Temperature and Low-Temperature Damage: A Case Study of Jiangsu Province, China

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