Modeling and Forecasting Average Temperature for Weather Derivative Pricing

<table class="table-group" id="tab4"><tr><td><table class="table"><tr><td class="thead-hr" colspan="2"><hr/></td></tr><tr><td align="left">Underlying</td><td align="center">HDD call</td></tr><tr><td align="left">City</td><td align="center">Zhengzhou</td></tr><tr><td align="left">Maturity</td><td align="center">January 2013</td></tr><tr><td align="left">Strike price (<svg height="9.04777pt" id="M100" style="vertical-align:-0.04981995pt" version="1.1" viewbox="-0.0498162 -8.99795 10.3669 9.04777" width="10.3669pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.0135,0,0,-0.0135,0,0)"><path d="M743 650H503L496 622L527 618C563 613 564 603 532 573C449 495 371 431 323 392C301 374 272 355 246 346L280 522C297 609 300 614 379 622L385 650H135L129 622C209 614 215 609 198 522L124 133C106 39 99 35 23 28L17 0H271L277 28C193 35 192 39 208 133L239 316C264 328 280 325 303 288C368 183 435 90 502 0H652L659 28C602 34 584 43 543 94C495 154 403 283 347 369L574 554C634 603 659 612 735 624L743 650Z" id="g113-76"></path><glyph.data ascent="3473" descent="-2876" horiz-adv-x="755" vert-adv-y="755"></glyph.data></g></svg>)</td><td align="center">422.5</td></tr><tr><td align="left">Nominal price (<svg height="14.7008pt" id="M101" style="vertical-align:-5.70285pt" version="1.1" viewbox="-0.0498162 -8.99795 16.8064 14.7008" width="16.8064pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.0135,0,0,-0.0135,0,0)"><path d="M822 650H589L583 622C660 617 677 607 674 561C672 534 664 481 647 390L600 137H596L273 650H126L120 622C176 620 194 615 207 594C221 571 225 557 214 504L161 257C141 166 129 112 121 85C108 42 83 30 29 28L23 0H260L266 28C193 33 173 42 176 89C178 122 186 172 202 255L256 527H259L583 -8H612L690 390C708 481 720 535 728 558C744 603 756 619 816 622L822 650Z" id="g113-79"></path><glyph.data ascent="3473" descent="-2876" horiz-adv-x="839" vert-adv-y="839"></glyph.data></g><g transform="matrix(.0095,0,0,-0.0095,10.486,3.264)"><path d="M573 302C573 402 527 451 414 451C386 451 343 446 313 437L330 513L320 522C295 508 261 484 243 463L230 415C194 400 159 383 126 359L131 330C159 344 187 357 222 368L109 -147C96 -204 80 -214 18 -223L13 -255L256 -244L259 -212L236 -210C184 -205 180 -195 191 -141L219 -1C240 -10 268 -12 284 -12C352 4 431 48 484 104C543 166 573 240 573 302ZM481 290C481 165 381 37 305 37C280 37 249 56 235 71L302 395C328 399 353 402 372 402C427 402 481 378 481 290Z" id="g50-113"></path><glyph.data ascent="3443" descent="-2856" horiz-adv-x="597" vert-adv-y="597"></glyph.data></g></svg>)</td><td align="center">100</td></tr><tr><td align="left">Free rate</td><td align="center">4%</td></tr><tr class="table-tr"><td colspan="2"><hr class="tbody-hr"/></td></tr></table></td></tr></table>

Advances in Meteorology

tab4

Table 4

Table 4: Modeling and Forecasting Average Temperature for Weather Derivative Pricing 