We think you have liked this presentation. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Thank you!
Presentation is loading. Please wait.
Published byDominique Grapes
Modified over 2 years ago
© Zurich Re Weather Risk Management David Molyneux, FCAS
© Zurich Re Introduction Weather Risk - Revenue or profits that are sensitive to weather conditions Weather Derivatives - Financial Products that allow companies to manage or hedge their weather related risk exposures
© Zurich Re Weather Derivative Basics Like Financial derivatives, Weather derivatives are used to hedge risk The value of a Financial derivative depends on the value of an underlying asset, index or commodity The value of a Weather option depends on the value of an underlying weather statistic Weather Derivatives protect against abnormal weather outcomes
© Zurich Re Weather Derivative Customers Utilities and energy companies Agricultural companies Municipalities Seasonal Clothing Manufacturers Ski/Beach Resort Operators Golf Course Management Companies Beverage Companies & Distributors
© Zurich Re Weather Derivative Risks Average Temperature - HDDs/CDDs Abnormal Temperature - # of Days above 100F Precipitation or snowfall Humidity Wind speed Riverflow Combinations of the above
© Zurich Re Heating and Cooling Degree Days Most temperature contracts in current practice are based on Heating Degree Days (HDD) for winter protection, and Cooling Degree Days (CDD) for summer protection. HDD = Max (0, 65 F - average temperature in a day) CDD = Max (0, average temperature in day - 65)
© Zurich Re How Weather Derivatives Work Pay off is based on a measurable index (CDD, HDD, etc) Pay off is based on how the index performs relative to a trigger or strike value - not on actual loss Coverage usually has a defined maximum limit
© Zurich Re Basic Option Terminology Weather Options pay off when the underlying weather statistic is above or below a certain strike value Put Options - pay if the weather statistic is below the predetermined strike value Call Options - pay if the weather statistic is above the predetermined strike value
© Zurich Re Option Payoffs
© Zurich Re Simple Example - Snow Removal Problem: The municipality of Fort Wayne, IN has spent $3,000,000 to provide for snow removal for the upcoming winter. This money will fund the equipment and labor to remove 12 inches of snow. Because of overtime rules, the municipality estimates that every additional1/2 inch of snow leads to an additional $250,000 of snow removal costs. Solution: A Snowfall call option which pays $250,000 per 1/2 inch of snowfall above a strike of 12 inches to a maximum of 20 inches.
© Zurich Re Snowfall Call Option Call Option Features Period = Nov-Mar Strike = 12 inches Limit = 20 inches Tick= $250,000 Limit = $4,000,000 Price = $500,000
© Zurich Re Snowfall Distribution
© Zurich Re Removal Costs With & Without the Call
© Zurich Re Effect of the Call Purchase If the total snowfall exceeds 12 inches - the payoff from the call exactly offsets the increased cost of snow removal Fort Wayne guarantees snow removal costs of $3.5 mil Variability is reduced - although Expected Cost is actually higher
© Zurich Re Pricing Weather Derivatives Method 1 - Apply Structure to Empirical Data –NCDC Historical Database –Adjust the Historical Data –Apply Derivative Structure to Adjusted Data Method 2 - Simulation –Fit a Probability Distribution to Adjusted Data –Model Stochastically Black Scholes does not work!!!
© Zurich Re Data Adjustments Station Changes –Instrumentation –Location Trends –Global Climate Cycles –Urban Heat Island Effect ENSO Cycles Forecasting
© Zurich Re Phoenix CDD Data
© Zurich Re Phoenix CDD Data - Adjusted
© Zurich Re Phoenix CDD Call Graph
© Zurich Re Phoenix CDD Call - Impact of Data Adjustments CDD Call Structure Period = Jun-Sept Strike = 3,200 Tick = $10,000 Limit = $2 mil All Year Expected Loss Based on Unadjusted Data: $826,000 Based on Adjusted Data: $1.3 mil
© Zurich Re Simulation Analysis Fit a Distribution to Adjusted Data –Normal & Lognormal often work for HDD/CDD –Other Statistical Models can be used for Percip, etc. Fit can be focused on area between strike and limit Run simulation analysis
© Zurich Re Portfolio Management Diversify Geographically & Directionally Track Correlations Between Cities Manage Transactional & Aggregate Limits Hedging & Trading Strategies
© Zurich Re Future of the Weather Market Growth in the Overall Size of the Market Larger/Multi-Year/More Complex Deals International Expansion Expanded End User Market Imbedding Weather Derivatives in Insurance or Other Types of Contracts
© Zurich Re Weather Risk Management David Molyneux, FCAS.
Weather Derivatives Sean Devlin ACAS, MAAA CAS Annual Meeting November A MERICAN R E 4.
THE WEATHER MARKET Rodney R. White University of Toronto.
HDD and CDD Option Pricing with Market Price of Weather Risk for Taiwan Hung-Hsi Huang Yung-Ming Shiu Pei-Syun Lin The Journal of Futures Markets Vol.
Introduction to Weather Derivatives By Anjelina Belakovskaia Weather Derivatives Trader Head of the Weather Desk at Williams Co. Copyright 2002 © Anjelina.
Russian Trading System Stock Exchange How to work with weatherfutures? How to work with weather futures?
Credit, Weather, Energy, and Insurance Derivatives Chapter 20.
Weather Derivatives Michaël Moreno *Speedwell is a member of the WRMA *Speedwell is regulated by the SFA.
Pricing Weather Derivatives Dr Adam Kucera, EdgeCap & Dr Harvey Stern, Bureau of Meteorology Dr Adam Kucera, EdgeCap & Dr Harvey Stern, Bureau of Meteorology.
Managing a Portfolio of Weather Derivatives June 14, 2000 beyond The Box Thinking.
Weather, Energy, and Insurance Derivatives Chapter 25 Options, Futures, and Other Derivatives, 7th International Edition, Copyright © John C. Hull
W Geneva December, 2007 World Meteorological Organization Simple Heating Degree Day Program.
Weather, Energy, and Insurance Derivatives Chapter 25 1 Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008.
© 2007 Thomson Delmar Learning, a part of the Thomson Corporation Chapter 9 Managing Other Hedging Risks.
1 Weather covers Customized Contracts WMO meeting, Geneva, December 2007.
PRICING A FINANCIAL INSTRUMENT TO GUARANTEE THE ACCURACY OF A WEATHER FORECAST Harvey Stern and Shoni S. Dawkins (Bureau of Meteorology, Australia)
Options and Futures Faculty of Economics & Business The University of Sydney Shino Takayama.
Risk Management and Derivatives. Volatility Volatility in returns is a classic measure of risk Perfect Market More systematic risk leads to more return.
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 29.1 Insurance, Weather, and Energy Derivatives Chapter 29.
FINANCE IN A CANADIAN SETTING Sixth Canadian Edition Lusztig, Cleary, Schwab.
Structured Products Hybrids October 2004 Return to Risk Limited website:
CHAPTEREIGHTEENOptions. Learning Objectives 1. Explain the difference between a call option and a put option. 2. Identify four advantages of options.
Introduction to Derivatives and Risk Management Corporate Finance Dr. A. DeMaskey.
Ace usa How to Make Retail Markets Work Presentation by Patricia Goudarzi, ACE USA Power Products to the New England Conference of Public Utility Commissioners.
Value-at-Risk: A Risk Estimating Tool for Management February 24, 2000 David Dudley Federal Reserve Bank of New York.
MAY 17, 2001 ENERGY MARKETS IN TURMOIL PRESENTED TO THE INSTITUTE FOR REGULATORY POLICY STUDIES
RISK MANAGEMENT: AN INTRODUCTION TO FINANCIAL ENGINEERING Chapter 24.
Chapter 10: Options Markets Tuesday March 22, 2011 By Josh Pickrell.
Exotic Investments Lesson 1 Derivatives, including Forwards, Futures and Options BONUS.
DERIVATIVES. Introduction Cash market strategies are limited Long (asset is expected to appreciate) Short (asset is expected to depreciate) Alternative.
Hedging in terms of Future and options in Stock Market.
Derivatives Derivative is a financial contract of pre-determined duration, whose value is derived from the value of an underlying asset. It includes.
Chapter 29 – Applications of Futures and Options BA 543 Financial Markets and Institutions.
Risk Management and Financial Institutions 2e, Chapter 15, Copyright © John C. Hull 2009 Credit Risk Losses and Credit VaR Chapter 15 1.
1 MGT 821/ECON 873 Financial Derivatives Lecture 1 Introduction.
University of Economics, Faculty of Informatics Dolnozemská cesta 1, Bratislava Slovak Republic Financial Mathematics in Derivative Securities and.
INTRODUCTION TO DERIVATIVES Introduction Definition of Derivative Types of Derivatives Derivatives Markets Uses of Derivatives Advantages and Disadvantages.
Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight.
Chapter 10 Derivatives Introduction In this chapter on derivatives we cover: –Forward and futures contracts –Swaps –Options.
Black-Scholes Energy, Inc. Eunice Chin, Cecilia Shi, Namgu Kim, Sebastian Sotelo FINC Fall 2013: Derivatives & Financial Markets Final Project.
Derivatives. What is Derivatives? Derivatives are financial instruments that derive their value from the underlying assets(assets it represents) Assets.
Derivatives Financial products that depend on another, generally more basic, product such as a stock.
Chapter 4 Introduction to Risk Management 4-1. Copyright © 2009 Pearson Prentice Hall. All rights reserved. 4-2 Basic Risk Management Firms convert inputs.
Hidden Risks in Casualty (Re)insurance Casualty Actuaries in Reinsurance (CARe) 2007 David R. Clark, Vice President Munich Reinsurance America, Inc.
Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Weather, Energy, and Insurance Derivatives Chapter 22 Pages.
Fundamentals of Futures and Options Markets, 7th Ed, Ch 24, Copyright © John C. Hull 2010 Weather, Energy, and Insurance Derivatives Chapter 24 Pages 521.
Pricing Integrated Risk Management Products CAS Seminar on Ratemaking San Diego, March 9, 2000 Session COM-45, Emerging Risks Lawrence A. Berger, Ph.D.
Financial Risk Management of Insurance Enterprises Options.
L21-Spring 2011 Module 1 L21 Enterprise Risk Management- A Case Study Objective: UGG Case-describe and illustrate enterprise risk management (ERM)
VALUE AT RISK. Definition : –The expected maximum loss ( or worst loss ) over a target horizon within a given confidence interval Evolved through the.
© 2017 SlidePlayer.com Inc. All rights reserved.