Volume 2, Issue 4
Option Pricing of Weather Derivatives for Seoul

Jiwoon Kim, Dongwoo Sheen & Sungwon Shin

East Asian J. Appl. Math., 2 (2012), pp. 309-325.

Published online: 2018-02

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  • Abstract

This article analyses temperature data for Seoul based on a well defined daily average temperature (DAT) derived from records dating from 1954 to 2009, and considers related weather derivatives using a previous methodology. The temperature data exhibit some quite distinctive features, compared to other cities that have been considered before. Thus Seoul has: (i) four clear seasons; (ii) a significant seasonal range, with high temperature and humidity in the summer but low temperature and very dry weather in winter; and (iii) cycles of three cold days and four warmer days in winter. Due to these characteristics, seasonal variance and oscillation in Seoul is more apparent in winter and less evident in summer than in the other cities. We construct a deterministic model for the average temperature and then simulate future weather patterns, before pricing various weather derivative options and calculating the market price of risk (MPR).

  • Keywords

Weather derivatives market price of risk HDD CDD CAT

  • AMS Subject Headings

91G20 60H15 60J65

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COPYRIGHT: © Global Science Press

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@Article{EAJAM-2-309, author = {Jiwoon Kim, Dongwoo Sheen and Sungwon Shin}, title = {Option Pricing of Weather Derivatives for Seoul}, journal = {East Asian Journal on Applied Mathematics}, year = {2018}, volume = {2}, number = {4}, pages = {309--325}, abstract = {

This article analyses temperature data for Seoul based on a well defined daily average temperature (DAT) derived from records dating from 1954 to 2009, and considers related weather derivatives using a previous methodology. The temperature data exhibit some quite distinctive features, compared to other cities that have been considered before. Thus Seoul has: (i) four clear seasons; (ii) a significant seasonal range, with high temperature and humidity in the summer but low temperature and very dry weather in winter; and (iii) cycles of three cold days and four warmer days in winter. Due to these characteristics, seasonal variance and oscillation in Seoul is more apparent in winter and less evident in summer than in the other cities. We construct a deterministic model for the average temperature and then simulate future weather patterns, before pricing various weather derivative options and calculating the market price of risk (MPR).

}, issn = {2079-7370}, doi = {https://doi.org/10.4208/eajam.171012.061112a}, url = {http://global-sci.org/intro/article_detail/eajam/10879.html} }
TY - JOUR T1 - Option Pricing of Weather Derivatives for Seoul AU - Jiwoon Kim, Dongwoo Sheen & Sungwon Shin JO - East Asian Journal on Applied Mathematics VL - 4 SP - 309 EP - 325 PY - 2018 DA - 2018/02 SN - 2 DO - http://doi.org/10.4208/eajam.171012.061112a UR - https://global-sci.org/intro/article_detail/eajam/10879.html KW - Weather derivatives KW - market price of risk KW - HDD KW - CDD KW - CAT AB -

This article analyses temperature data for Seoul based on a well defined daily average temperature (DAT) derived from records dating from 1954 to 2009, and considers related weather derivatives using a previous methodology. The temperature data exhibit some quite distinctive features, compared to other cities that have been considered before. Thus Seoul has: (i) four clear seasons; (ii) a significant seasonal range, with high temperature and humidity in the summer but low temperature and very dry weather in winter; and (iii) cycles of three cold days and four warmer days in winter. Due to these characteristics, seasonal variance and oscillation in Seoul is more apparent in winter and less evident in summer than in the other cities. We construct a deterministic model for the average temperature and then simulate future weather patterns, before pricing various weather derivative options and calculating the market price of risk (MPR).

Jiwoon Kim, Dongwoo Sheen & Sungwon Shin. (1970). Option Pricing of Weather Derivatives for Seoul. East Asian Journal on Applied Mathematics. 2 (4). 309-325. doi:10.4208/eajam.171012.061112a
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