Risk Loading and Implied Volatility in the Pricing of Weather Options
12 Pages Posted: 30 Dec 2003
Date Written: December 20, 2003
Observed weather option prices can be interpreted using either a Black-Scholes type model with implied volatility, or an insurance based pricing approach with risk-loading. We study the relationship between the two.
Keywords: Weather, weather derivatives, implied volatility, implied standard deviation, risk loading
JEL Classification: G13
Suggested Citation: Suggested Citation