This talk will introduce weather derivatives and discuss methods by which they can be priced, both now, and in a future, more liquid market.
The current weather derivative market is highly illiquid, and actuarial methods are used for pricing. A review is given of the various techniques currently used in industry, and some of their characteristics, including the roles of data cleaning, burn and simulation methods, portfolios and the incorporation of weather and seasonal forecasts. There will also be some discussion of what measures should be used for risk management in a trading organisation.
There will also be some speculation about how the market might develop, and various no-arbitrage based models will be presented based on different assumptions about the future state of the market and the types of forecasts being used.
The content of the talk will be a combination of actuarial science, meteorology, time-series analysis and no-arbitrage pricing.