The use of the Black-Scholes Model in the Field of Weather Derivatives

Botoş, Horia Mircea; Ciumaș, Cristina

doi:10.1016/s2212-5671(12)00203-1

Cited by 10 publications

(7 citation statements)

References 10 publications

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“…However, as mentioned in the “Introduction” section, weather derivatives differ from traditional financial derivatives in the fact that their underlying variable cannot be traded in the market (Wang et al, 2015: 1). For this reason, and given that “weather models do not follow a Geometric Brownian motion” (Li, 2018: 1044), the Black–Scholes model cannot be applied directly for weather derivatives valuation (Botoş and Ciumaş, 2012: 612; Li, 2018: 1044; Meissner and Burke, 2011: 616). As a consequence, different and more computationally demanding techniques are required for the pricing of these instruments.…”

Section: Methodsmentioning

confidence: 99%

“…Concretely, weather derivatives are financial instruments that can be implemented by firms as part of their risk management strategy to hedge against the risk of unexpected meteorological states. The difference from other derivatives is that the underlying variable (rain/temperature/wind) is not tradable and thus has no direct monetary value (Botoş and Ciumaş, 2012: 611; Torró et al, 2003: 7). The introduction of these tools has implied a relevant change in the previous risk management panorama, where loss-based insurance was the only available financial meteorological risk management alternative.…”

Section: Introductionmentioning

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: Methodsmentioning

confidence: 99%

Section: Introductionmentioning

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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“…Weather derivatives are used to manage the economic consequence of non-catastrophic weather events on companies' performance [1][2][3][4][5][6][7][8][9][10][11][12][13]. Given there is no standardised pricing model for weather derivatives, recent studies have developed different pricing models using underlying indices derived from climatic variables like temperature [2,4,5,8,[10][11][12][14][15][16], irradiance [17], rainfall [3,6] and wind [18][19][20][21]. The derivatives most used are options [3][4][5][6][7][8]11,15,16,22,23], futures [2,10,12] and swaps [15,24].…”

Section: Introductionmentioning

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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“…The black scholes model has application in insurance and finance such as crop insurance pricing (Filiapuspa et al 2019), pricing of index insurance (Okine, 2014), natural disaster insurance premiums (Sukono et al, 2020), pricing of palm-oil futures (Okaro et al, 2018), estimating high-cost illness insurance (Chicaíza and Cabedo, 2009), field of weather derivatives (Botoş and Ciumaş, 2012), increased market volatility from hedging strategies (Ronnie Sircar and Papanicolaou, 1998), Micro-insurance product for medical insurance (Magero. 2018).…”

Section: Introductionmentioning

confidence: 99%

Determining Agricultural Premium Insurance in Malang City using Black Scholes Model

Widi

Lani

Hasanah

2021

ijgor

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This study examines the determination of rainfall-based agricultural insurance premium prices using the Black-Scholes model. The Black-Scholes model was originally used to determine the price of European-type options. The research method used is a literature study with secondary data collection. The data used in this study are rainfall data and rice production results in the city of Malang from 2015 to 2020. Based on the results and discussion, rainfall which is strongly correlated with rice production results is in quarter 2. The premium results obtained are different according to the desired percentile. In addition to percentiles, taking R_0 also affects the premium price. When R_0=322, the premium price tends to be cheaper than R_0=271.

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The use of the Black-Scholes Model in the Field of Weather Derivatives

Cited by 10 publications

References 10 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

Determining Agricultural Premium Insurance in Malang City using Black Scholes Model

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