Risk Neutral Pricing of Weather Derivatives

In this video, we finally use the risk-neutral pricing methodology for valuation of our temperature options in python. In this online tutorial series dedicated to weather derivatives we have estimated the parameters of our modified mean-reverting Ornstein-Uhlenbeck process which defines our Temperature dynamics, and have now implemented different models for our time varying volatility. Now we move on to calculating option prices using both Monte Carlo simulation method under the risk neutral probability measure and an alternative black scholes like approximation for winter seasons!
Online written tutorial: quantpy.com.au/weather-deriva...
In this series we take a deep dive into a type of exotic financial products weather derivatives. Weather derivatives are financial instruments that can be used to reduce risk associated with adverse weather conditions like temperature, rainfall, frost, snow, and wind speeds.
Historical Data, Weather Observations for Sydney, Australia - Observatory Hill: www.bom.gov.au/climate/data/st...
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[@jemz9314]

Another great vid. Awesome job!

[@nickysonnemans4567]

Awesome videos, just found out about your channel. Keep it up!

[@alvaroromo5885]

Really nice video! I think it would be really great if you could also show how to calibrate the lambda in the Monte-Carlo approach from traded option prices.

[@yoltic7642]

wut this is dope

[@wenjiewan6390]

What does risk neutral mean here? I don’t think you can hedge temperature. So the risk is never neutral.

[@joshuanappa5199]

Risk neutral refers to probability of future outcomes adjusted for risk.

[@QuantPy]

The term Hedging temperature, can be done, and would refer to hedging the risk of price changes that are sensitive to prices in temperature. For example oil, electricity, grain, gas all have products that are extremely dependent on temperature. You can hedge temperature risk by purchasing or selling weather derivatives. But to your questions risk neutral is a probability measure that means there is a no-arbitrage environment.