Pricing Summer Days Options by Good - Deal Bounds

Abstract

Despite the worldwide popularity of CDD- and HDD-type weather derivatives on temperature, a different class of weather derivatives, the so-called summer days options, is more popular in Japan, whose payoffs are determined by the number of summer days (i.e., the days whose average temperature is above 25 Celsius) during the contract period. In this paper, we price such summer days options by the Good-Deal Bounds of Cochrane and Saa-Requejo (2000), using the temperature data in Tokyo. We then compare the summer days options with the CDD options.

Keywords: Weather derivatives, Incomplete markets, Good - deal bounds, Summer days

JEL Classification: G13, L94, Q41