Weather Derivatives and Weather Risk Management |
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| Authors: | Patrick L. Brockett Mulong Wang Chuanhou Yang |
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| Affiliation: | Patrick Brockett is with the Red McCombs School of Business, University of Texas at Austin. Mulong Wang is at the College of Business Administration, University of Rhode Island. Chuanhou Yang is at the Dahlkemper School of Business, Gannon University. This article was subject to anonymous peer review. |
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| Abstract: | Weather derivatives are a relatively recent kind of financial product developed to manage weather risks, and currently the weather derivatives market is the fastest-growing derivative market. The development of weather derivatives represents one of the recent trends toward the convergence of insurance and finance. This article presents an overview of weather risks, weather derivatives, and the weather derivatives market, and examines the valuation of weather derivatives in an incomplete market, the hedging effectiveness of standardized weather derivatives, as well as optimal weather hedging with the consideration of basis risk and credit risk. |
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