Title: Modelling and managing weather derivatives

Boualem Djehiche
Skandia Liv

Please Note that the seminar will be held in MH:C.

Abstract
We suggest a pricing model for temperature based weather derivatives. The
approach we use is to first find a stochastic process that describes the
evolution of the temperature. Since temperature is not tradable, the market
for weather derivatives is incomplete. Thus we have to consider the market
price of risk to be able to compute unique prices of the contracts. As
application, we use historical temperature data from the last 40 years from
different Swedish cities to estimate the unknown parameters in the
temperature process.  Numerical examples of prices of some contracts are
presented, using an approximation formula as well as Monte Carlo
simulations.