Modelling temperature derivatives using Levy processes

Abstract

Weather derivatives are a new risk manage tool which can be widely used in the financial market to avoid the impact of bad weather effects and control the weather risks (Wang et al, 2015). weather derivatives are different from traditional financial derivatives as their underlying asset such as temperature, humidity and precipitation, which cannot be traded in the market, so ordinary pricing models such as black scholes formula is not applicable in pricing weather derivatives. the underlying commodity results into one considering the incomplete markets theory when modelling the temperature data.