Weather Derivatives Modeling and Pricing Weather-Related Risk
Weather derivatives are financial instruments that can be used by organizations or individuals as part of a risk management strategy to minimize risk associated with adverse or unexpected weather conditions. Just as traditional contingent claims, a weathe
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Antonis K. Alexandridis • Achilleas D. Zapranis
Weather Derivatives Modeling and Pricing Weather-Related Risk
Antonis K. Alexandridis School of Mathematics, Statistics and Actuarial Science University of Kent Canterbury, UK
Achilleas D. Zapranis Department of Accounting and Finance University of Macedonia Thessaloniki, Greece
ISBN 978-1-4614-6070-1 ISBN 978-1-4614-6071-8 (eBook) DOI 10.1007/978-1-4614-6071-8 Springer New York Heidelberg Dordrecht London Library of Congress Control Number: 2012952584 # Springer Science+Business Media New York 2013 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher’s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)
Preface
In the last decade, a new category of financial derivatives was developed, namely, weather derivatives. These financial products were developed by energy and utility companies as an effective tool for hedging the volumetric risk of the energy units sold, rather than the price risk of each unit. Weather derivatives are financial instruments that can be used in order to reduce risk associated with adverse or unexpected weather conditions. The payoff of a weather derivative depends upon the index of an underlying weather measure such as rainfall, temperature, humidity, or snowfall. In contrast to the classical financial markets, the weather market is incomplete i
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