Weather Forecasting for Weather Derivatives Research Proposal

Weather Forecasting for Weather Derivatives - Research purpose ExampleThe goal is to determine which method leads to the smallest forecasting error. The forecast is performed only for the one time criterion ahead and is not required to provide long lasting forecast.Since their inception in 1996, wear derivatives take up grown in large quantities. Today, weather derivatives are being used for hedging purposes by companies and industries, whose gain can be adversely affected by unseasonal weather or, for speculative purposes by hedge property and others interested in capitalizing on those volatile markets. A weather derivative is a financial actor that has a payoff derived from variables such as temperature, snowfall, humidity and rainfall. However, it is estimated that 98-99% of the weather derivatives now traded are based on temperature. Temperature contracts take a shit as an underlying variable, temperature indices such as Heating Degree Days (HDD) or chilling Degree Days (CDD) defined on average daily temperatures. The list of traded contracts is extensive and constantly evolving. In the Chicago Mercantile Exchange (CME) there are traded weather contracts based on an index of additive Average Temperature (CAT) for European cities for May to September (Zapranis).Many weather derivatives are traded long before the crop up of the contract and long before there are any useful forecasts which can indicate the probable weather during the contract period. For instance, contracts for the winter period may be traded in the preceding spring and aboriginal summer. In this case, only historical observational data are required for derivative valuation. It is also plebeian for weather derivatives to be priced just before and during the period of the contract. There are two main reasons for this. The rst is that weather derivatives are traded at these times. This can be for economic hedging reasons, or purely for speculation. The second is that companies that have traded a weather derivative often need to track the value of the