Indicative FSP

Weather Derivatives: Analysis and model development for securitization of physical risks

The main objective of this project was to present weather derivatives as tools for hedging against weather risk. This study focused on the Greek agricultural economy, which is weather-sensitive. Initially, the characteristics of weather derivatives and their market were analyzed. Then, various pricing models were presented, as there is no widely accepted model for the calculation of the fair price of weather derivatives. Agricultural associations can transfer their weather risk with the purchase of a weather derivative contract from a financial institution. The latter, in turn, can transfer that risk to investors through securitization, which effectively is a bond issuance. Furthermore, a presentation of catastrophe bonds and their actual pricing methods was carried out. The project proceeded with the design of a model to securitize climatic risk with the introduction of a case study. Moreover, a comparative analysis of the different methodologies was conducted, in order to reach a final model for hedging against weather risk. The project concluded with the construction of a model for the securitization of weather risk.

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