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Zbl 1164.62077
Benth, Fred Espen; Benth, Jürat\D{e} Šaltyt\D{e}; Koekebakker, Steen
Putting a price on temperature. (English)
[J] Scand. J. Stat. 34, No. 4, 746-767 (2007). ISSN 0303-6898; ISSN 1467-9469/e

A market of futures and options on different temperature indices at the Chicago Mercantile Exchange (CME) is considered. The temperature dynamics is modelled by a multivariate continuous-time AR(p) process with seasonally varying volatility. Pricing measures for futures are introduced via the Girsanov transform. An explicit Black formula and its hedging strategy are evaluated for the call option price on cumulative average temperature (CAT) futures. Suitable Monte Carlo simulations are presented for prices of call options on some other temperature indices. The models were fitted to a data on Stockholm daily average temperatures from 1961 to 2006.
[R. E. Maiboroda (Ky\"iv)]

MSC 2000:: *62P05 Appl. of statistics to actuarial sciences and financial mathematics
62M10 Time series, etc. (statistics)
91B26 Market models
65C05 Monte Carlo methods
91B84 Economic time series analysis

Keywords: continuous time autoregressive model; temperature derivatives; Samuelson effect

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