Weather derivatives (HDD, CDD)

HDD and CDD swaps, calls and puts with a tick size and cap, valued by burn analysis of past seasons (with detrending), a normal index in closed form, or a simulation of daily temperature mean-reverting to a seasonal mean, with the payout distribution.

Inputs

IndexContractPeriod fromPeriod to

Strike (degree days)

Tick per degree day

Cap (0: none)

Base temperature

ModelCurrencyCurve

Curve: flat rate% cc

Index in past seasons, oldest firstComma or space separated.Remove a linear trend

Results

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Methodology

Conventions

HDD sums max(base − T, 0) and CDD max(T − base, 0) over the days' average temperatures.
Burn analysis applies the payout to each past season; the index model is normal; the simulation runs daily temperatures.
Values are expected payouts, discounted from the period end, with no risk premium.

References

Jewson and Brix (2005)
Alaton, Djehiche and Stillberger (2002)

Formulas

Payout: min(cap, tick · max(I − K, 0))
Temperature: T_d = T̄ + A cos(2π(d − d*)/365) + Y_d