Horizon Value at Risk for Weather Derivatives Part 1: Single Contracts

Abstract

We describe two methods for the calculation of horizon value at risk for single weather derivative contracts. Both methods are based on the volatility of the stochastic process for the expected index. The simpler of the two methods involves a linearisation, and is only appropriate for short horizons. The more complex method is appropriate for any horizon, and coincides with the expiry value at risk when the horizon coincides with expiry.

Keywords: weather, weather derivatives, value at risk, horizon value at risk

JEL Classification: G13