Weather has a significant impact on business activities of many kinds. The list of economic activities subjected to the risk of the weather include: the energy producers and consumers, the industry of leisure, the insurance industry, the food industry and the agricultural industries but the primary industry, namely the energy industry, has given rise to the demand for weather derivatives and has caused the weather risk management industry to evolve actively. A derivative is a contract or security, whose payoffs depend upon the price of an underlying asset price, and is used to control the risks of naturally-arising exposures to such an asset price. Therefore weather derivatives are financial contracts with payouts that depend on weather in some form. It is a contract that provides a payoff in response to an index level based on weather phenomena (West, 2002).The underlying variable can be for example humidity, rain, snowfall, temperature, or even sunshine. The main players who take part in the weather derivatives markets industry can be grouped in to five main categories, namely: 1) End users who are also referred to as hedgers 2) Speculators 3) Market makers 4) Brokers 5) Insurance and re-insurance companies. Since the late 90’s when the first weather derivatives transactions were recorded, the underlying market has witnessed the development of a new derivative market in the United States, which is gradually expanding across Europe. However, the newly developed market for weather derivatives is not liquid in Africa and specifically South Africa mainly due to the following factors: 1) Many companies and business organisations have not yet established a hedging policy or even figured out how their businesses or industries are exposed to weather risks. 2 2) “Since many companies and industries depend on insurance companies to cover their risks, it is possible that the solutions suggested by these companies or industries looking for protection from weather risks differ according to the cover provided by these insurance organisations “(Micali, 2008). The main aim of this study is to review available statistical models for pricing derivatives, with temperature as the underlying which could enable industries, businesses and other organisations in South Africa to protect themselves against losses due to fluctuations in the weather and therefore hedge their risks.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:nmmu/vital:10567 |
| Date | January 2009 |
| Creators | Nasila, Mark Wopicho |
| Publisher | Nelson Mandela Metropolitan University, Faculty of Science |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis, Masters, MSc |
| Format | iii, 80 leaves, pdf |
| Rights | Nelson Mandela Metropolitan University |
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