1、Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.1,Insurance, Weather, and Energy Derivatives,Chapter 29,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.2,Weather Derivatives: Definitions,Heating degree days (HDD): For each day this is max(0,
2、65 A) where A is the average of the highest and lowest temperature in F.Cooling Degree Days (CDD): For each day this is max(0, A 65),Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.3,Weather Derivatives: Products,A typical product is a forward contract or an option on th
3、e cumulative CDD or HDD during a monthWeather derivatives are often used by energy companies to hedge the volume of energy required for heating or cooling during a particular month,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.4,Energy Derivatives,Main energy sources:O
4、ilGasElectricity,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.5,Oil Derivatives,Virtually all derivatives available on stocks and stock indices are also available in the OTC market with oil as the underlying assetFutures and futures options traded on the New York Merc
5、antile Exchange (NYMEX) and the International Petroleum Exchange (IPE) are also popular,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.6,Natural Gas Derivatives,A typical OTC contract is for the delivery of a specified amount of natural gas at a roughly uniform rate to
6、specified location during a month. NYMEX and IPE trade contracts that require delivery of 10,000 million British thermal units of natural gas to a specified location,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.7,Electricity Derivatives,Electricity is an unusual commo
7、dity in that it cannot be storedThe U.S is divided into about 140 control areas and a market for electricity is created by trading between control areas.,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.8,Electricity Derivatives continued,A typical contract allows one sid
8、e to receive a specified number of megawatt hours for a specified price at a specified location during a particular monthTypes of contracts: 5x8, 5x16, 7x24, daily or monthly exercise, swing options,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.9,How an Energy Producer
9、 Hedges Risks,Estimate a relationship of the formY=a+bP+cT+ewhere Y is the monthly profit, P is the average energy prices, T is temperature, and e is an error termTake a position of b in energy forwards and c in weather forwards.,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. H
10、ull,29.10,Insurance Derivatives,CAT bonds are an alternative to traditional reinsuranceThis is a bond issued by a subsidiary of an insurance company that pays a higher-than-normal interest rate.If claims of a certain type are above a certain level the interest and possibly the principal on the bond
11、are used to meet claims,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,29.11,Valuation Issues,To a good approximation insurance, weather, and energy prices can be assumed to have zero systematic risk. This means that the “actuarial approach” and the risk-neutral valuation approach should give similar answers,
