Weather Derivatives

As a result of the affect of normal variations and extreme or catastrophic events of weather and climate, a growing number of businesses and government entities are seeking out methods to manage their exposure to weather risk, which include the use of derivatives, insurance products and changes in their operations. This course provides a comprehensive and technical treatment of the valuation and risk management of weather derivatives.

This course can be tailored to your needs. A sample outline is shown below.

Day 1


Introduction and data analysis

  • Fundamentals of weather derivatives
  • Weather related risks
  • Recent market developments
  • Weather versus financial derivatives
  • Where to find information
  • Heating degree days and cooling degree days
  • Temperature, precipitation, wind analysis

Workshop: analysing weather data


Weather derivative structures

  • Using derivatives for weather risk management
  • Weather hedging strategies
  • Exchange traded weather derivatives – payoffs and analysis
  • Over-the-counter weather derivatives – degree day options, calls, puts, and collars
  • Temperature, precipitation and wind speed contracts
  • Hedging volumetric risk

Workshop: analysis of payoffs for a range of weather derivatives using data from various regions


Day 2


Basics of modelling weather for pricing derivatives

  • Summary of weather derivative pricing approaches
  • Will Black-Scholes do?
  • Historical simulation (Burn Analysis)
  • Introduction to Monte-Carlo simulation for weather derivative pricing
  • Pricing weather derivatives

Workshop: using burn analysis and Monte-Carlo simulation for pricing a range of weather derivatives


Advanced models for weather derivative pricing

  • Introducing more advanced techniques – mean reversion, jumps, time varying patterns for seasonality, joint modelling of regions
  • Value-at-risk for weather derivatives – correlations and extreme events

Workshop: using advanced models for pricing a range of weather derivatives

To discuss your in-house course requirements, contact us.