Influence of Hedging Cost upon Weather Derivatives Pricing
Journal of Finance and Accounting
Volume 4, Issue 4, July 2016, Pages: 234-238
Received: Jan. 24, 2016; Accepted: Feb. 29, 2016; Published: Aug. 2, 2016
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Author
Teng Lei, Business School, Chengdu University of Information Technology, Chengdu, China
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Abstract
Weather derivatives play a major role in risk management of non-catastrophic weather market. The healthy development of the derivatives market is inseparable from the reasonable pricing of the product itself. As non-traditional financial derivatives, weather derivatives can provide a good risk hedging. Meanwhile, in the weather derivatives market, brokers play an even more important part than in the traditional financial derivatives market. Therefore, when pricing weather derivatives, we must take two factors into consideration, namely, brokers as market makers as well as the impact of their hedging cost on weather derivatives pricing. Based on the expected claims and risk payment of basic derivatives contracts, this paper is going to discuss weather derivatives pricing on the basis of hedging costs, while taking into account the impact of market makers’ hedging costs, risk aversion and existing positions.
Keywords
Weather Derivatives, Hedging, Market Makers
To cite this article
Teng Lei, Influence of Hedging Cost upon Weather Derivatives Pricing, Journal of Finance and Accounting. Vol. 4, No. 4, 2016, pp. 234-238. doi: 10.11648/j.jfa.20160404.19
Copyright
Copyright © 2016 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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