Valuation and hedging of weather derivatives on monthly average temperature

Yamada, Yuji; 山田, 雄二

doi:10.21314/jor.2007.157

Cited by 24 publications

(10 citation statements)

References 3 publications

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“…However, in order to obtain the indifference price it is essential to specify the probability distribution function of the risky portfolio return. Yamada [30] assumes that the risky portfolio return follows a normal distribution to obtain closed form solutions for the indifference valuation of monthly average temperature derivatives. As a special case of indifference pricing marginal pricing is proposed by Davis [11].…”

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confidence: 99%

A multi-period equilibrium pricing model of weather derivatives

Lee

Oren

2010

Energy Syst

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The prevalence of commercial activities whose profit and cost are correlated with weather risk makes weather derivatives valuable financial instruments that enable hedging of price or volumetric (quantity) risk in many industries. This paper proposes a multi-period equilibrium pricing model for weather derivative. In our stylized economy representative agents of weather-sensitive industries optimizes their hedging portfolios that drive the supply and demand for weather derivative which are dynamically determined based on a utility indifference pricing framework. At equilibrium the weather derivative market will be cleared and their market price can be obtained. Numerical examples illustrate the equilibrium prices and optimal choices for the weather derivative as function of the correlation between weather indices and demand for the underlying commodity. We also demonstrate the benefit of multiple trading opportunities which allows rebalancing of the hedging portfolio prior to the commodity delivery date, as compared to a single shot framework.

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confidence: 99%

A multi-period equilibrium pricing model of weather derivatives

Lee

Oren

2010

Energy Syst

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“…La Guajira is one of the territories in South America with the highest wind energy potential and with an installable capacity of around 18 GW. In this department, the highest wind regimes that Colombia receives during the whole year are concentrated, with average speeds close to 9 m/s (at 80 m of height) and prevailing east-west direction [55].…”

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confidence: 98%

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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“…Instead of applying standard derivatives, unique derivatives based on nonparametric regression techniques have been proposed to further improve the hedging effectiveness [28][29][30][31][32][33][34]. The approach of those studies is to estimate the nonlinear functions of the optimal payoffs and/or the optimal contract volumes of the derivatives using generalized additive models (GAMs [35,36]).…”

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confidence: 99%

Going for Derivatives or Forwards? Minimizing Cashflow Fluctuations of Electricity Transactions on Power Markets

Yamada

Matsumoto

2021

Energies

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In a competitive electricity market, both electricity retailers and generators predict future prices and volumes and execute electricity delivery contracts through power exchange. In such circumstances, they may suffer from uncertainties caused by fluctuations in spot prices and future demand due to their high volatility. In this study, we develop a unified approach using derivatives and forwards on the spot electricity price and weather data to mitigate the cashflow fluctuation for power utilities. We aim to clarify the applicability of our proposed methods and provide a new and useful perspective on hedging schemes involving various electricity utilities, such as power retailers, solar photovoltaic (PV) generators, and thermal generators. Moreover, we analyze the risk of risk takers (such as the insurance companies in this study) in the derivatives market. In addition, we perform empirical simulations to measure out-of-sample hedging effects on their cashflow management using actual data in Japan.

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Valuation and hedging of weather derivatives on monthly average temperature

Cited by 24 publications

References 3 publications

A multi-period equilibrium pricing model of weather derivatives

A multi-period equilibrium pricing model of weather derivatives

Wind Put Barrier Options Pricing Based on the Nordix Index

Going for Derivatives or Forwards? Minimizing Cashflow Fluctuations of Electricity Transactions on Power Markets

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