Weather Derivatives and Weather Risk Management

14 Pages Posted: 14 Feb 2007

See all articles by Patrick L. Brockett

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management

Mulong Wang

University of Texas at Austin

Charles C. Yang

Florida Atlantic University

Abstract

Weather derivatives are a relatively recent kind of financial product developed to manage weather risks, and currently the weather derivatives market is the fastest-growing derivative market. The development of weather derivatives represents one of the recent trends toward the convergence of insurance and finance. This article presents an overview of weather risks, weather derivatives, and the weather derivatives market, and examines the valuation of weather derivatives in an incomplete market, the hedging effectiveness of standardized weather derivatives, as well as optimal weather hedging with the consideration of basis risk and credit risk.

Suggested Citation

Brockett, Patrick L. and Wang, Mulong and Yang, Charles C., Weather Derivatives and Weather Risk Management. Risk Management & Insurance Review, Vol. 8, No. 1, pp. 127-140, March 2005, Available at SSRN: https://ssrn.com/abstract=963008 or http://dx.doi.org/10.1111/j.1540-6296.2005.00052.x

Patrick L. Brockett (Contact Author)

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States

Mulong Wang

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Charles C. Yang

Florida Atlantic University ( email )

777 Glades Road
Boca Raton, FL 33431
United States

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