Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257633 
Year of Publication: 
2019
Citation: 
[Journal:] International Journal of Financial Studies [ISSN:] 2227-7072 [Volume:] 7 [Issue:] 3 [Article No.:] 35 [Publisher:] MDPI [Place:] Basel [Year:] 2019 [Pages:] 1-14
Publisher: 
MDPI, Basel
Abstract: 
This paper follows an incomplete market pricing approach to analyze the evaluation of weather derivatives and the viability of a weather derivatives market in terms of hedging. A utility indifference method is developed for the specification of indifference prices for the seller and buyer of a basket of weather derivatives written on rainfall and temperature. The agent's risk preference is described by an exponential utility function and the prices are derived by dynamic programming principles and corresponding Hamilton Jacobi-Bellman equations from the stochastic optimal control problems. It is found the indifference measure is equal to the physical measure as there is no correlation between the capital market and weather. The fair price of the derivative should be greater than the seller's indifference price and less than the buyer's indifference price for market viability and no arbitrage opportunities.
Subjects: 
incomplete market
basket option
indifference price
utility function
dynamic programming principle
Hamilton Jacobi-Bellman equations
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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