The paper focuses on valuation of a weather derivative with payoffs depending on temperature. We use historical data from the weather station in the Slovak town Košice to obtain unique prices of option contracts in an incomplete market. Numerical examples of prices of some contracts are presented, using the Burn analysis. We provide an example of how a weather contract can be designed to hedge the financial risk of a suboptimal temperature condition. The comparative comparison of the selected option hedging strategies has shown the best results for the producers in agricultural industries who hedges against an unfavourable weather conditions. The results of analysis proved that by buying put option or call option, the farmer establishes the highest payoff in the case of temperature decrease or increase. The Long Straddle Strategy is the most expensive but is available to the farmer who hedges against a high volatility in temperature movement. We conclude with the findings that weather derivatives could be useful tools to diminish the financial losses for agricultural industries highly dependent for temperature.
The purpose of the paper is to focus on innovative structured products − investment certificates. The paper shows the creation techniques of a new discount basket certificate using two-asset correlation options, which play the central role in financial engineering. The possibilities of investment using given certificates are investigated for potential investors. Methodology: Methodology of the paper is based on European style two-asset correlation options in analytical expression whose payoff is based on two underlying assets with two strike prices. Due to the lack of real-traded two asset correlation option data, own calculations of option premiums are processed in statistical program R. Also, the pricing of the new discount basket certificate is examines. Approach: Theoretical value of the new discount basket certificate with different levels of its parameters on the stocks Facebook and Google is obtained and it is performed the analysis of the profitability for to the investor at the maturity date. Also, there is showed which parameters the investor should pay attention when deciding to invest into the given investment certificate. Findings: Specific characteristics of each proposed certificate are pointed out and compared to each other with conclusion that every certificate can be the most profitable in specific price development of the underlying assets, but not in every price development. Ideas on how this certificate can be part of a personal investment portfolio are also presented.
The paper deals with investing in agriculture based on structured products, which gains an important position in international investment for both institutional and retail investors. The aim of the paper is to present the proposal of two new types of investment certificates, i.e. Twin-Win Outperformance certificates and Capped Twin-Win Outperformance certificates, which belong to the segment of partially guaranteed investment tools due to a security buffer. The advantage the proposed certificates lies in the combination of the features of two certificates into one product. The certificates are described in an analytical form of the profit functions which are derived based on two components, i.e. the underlying asset and the derivative (used European call options and down and knock-out put barrier options) on its underlying asset. The pricing formulas are developed with a specification of the issue price sensitivity on changes in different input parameters. Opportunities to invest in these proposed certificates are being demonstrated in the agricultural market, i.e. Teucrium Corn Fund ETF, where various variants of these certificates are created based on different level of included parameters. The best results are performed with the objective to increasing of the intellectualization of all potential investors in investing to agriculture using corn futures.
In this paper we perform an analysis of a capped reverse bonus certificate, the value of which is derived from the value of an underlying asset. A pricing formula for the portfolio replication method is applied to price the capped reverse bonus certificate. A replicating portfolio has profit that is identical to profit from a combination of positions in spot and derivative market, i.e. vanilla and exotic options. Based upon the theoretical option pricing models, the replicating portfolio for capped reverse bonus certificate on the Euro Stoxx 50 index is engineered. We design the capped reverse bonus certificate with various parameters and calculate the issue prices in the primary market. The profitability for the potential investor at the maturity date is provided. The relation between the profit change of the investor and parameters’ change is detected. The best capped reverse bonus certificate for every estimated development of the index is identified.
Recently, the agricultural business is displayed a greater amount of risk because of price volatility growth. Consequently, it is necessary to have knowledge of how to regulate the risk of price fluctuations. This paper is concerned with the hedging techniques in the commodity market by the help of vanilla options. The main idea is to analyze option strategies with the ambition to demonstrate their utilization by hedging against increasing prices. Hedged buying price formulas are derived for every spot futures price. An additional contribution is considered for applying in the wheat trading. Chicago Mercantile Exchange products, i.e. wheat options on futures are investigated. The profitability of hedged scenarios is examined. A comparative analysis of the designed hedging variants is presented. Suggestions for potential wheat buyers are proposed.
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