Search results

1 – 2 of 2
Per page
102050
Citations:
Loading...
Access Restricted. View access options
Article
Publication date: 17 August 2010

Mulong Wang, Min‐Ming Wen and Charles C. Yang

The paper aims to examine theoretically valuation of weather derivatives and their hedging roles in corporate risk management.

1880

Abstract

Purpose

The paper aims to examine theoretically valuation of weather derivatives and their hedging roles in corporate risk management.

Design/methodology/approach

The paper introduces an extended financial market model in which the weather risk is included as an independent random process and examines the effectiveness of weather derivatives and traditional price forwards in a unified theoretical framework. It also provides a no‐arbitrage approach to price weather derivatives, which theoretically combines the actuarial and financial paradigms.

Findings

The results document that corporate leverage level is an essential factor determining the choice between price forwards and weather derivatives. In some cases; weather derivatives outperform price forwards, while in some other cases; a joint use of both instruments is optimal, depending on the firm's risky leverage level. Interestingly, the paper identifies the case when the leverage level is very high, the positive roles of both instruments diminish and the firm is unhedgeable.

Originality/value

The paper provides important insights to investors and hedgers and extends the literature on corporate risk management.

Details

The Journal of Risk Finance, vol. 11 no. 4
Type: Research Article
ISSN: 1526-5943

Keywords

Access Restricted. View access options
Article
Publication date: 6 November 2009

Charles C. Yang, Patrick L. Brockett and Min‐Ming Wen

The purpose of this paper is to examine empirically the basis risk and hedging efficiency of temperature‐indexed standardized weather derivatives in hedging weather risks in the…

1554

Abstract

Purpose

The purpose of this paper is to examine empirically the basis risk and hedging efficiency of temperature‐indexed standardized weather derivatives in hedging weather risks in the US energy industry.

Design/methodology/approach

Within the risk minimization framework, using power load and temperature data, this research analyzes both linear and nonlinear hedging strategies using the two most popular types of standardized indexes – city indexes and regional indexes.

Findings

The results indicate that the city indexes and regional indexes are not consistently superior to each other and the regional indexes should be a good complement to the current exchange‐listed indexes. The results also document that the basis risk is sufficiently low for the diversified power producers serving the US Northeast or Mid‐Atlantic regions in both the summer and winter seasons and California in the summer season. However, the basis risk is very high for the diversified power producers serving California in hedging the weather risk in the winter season. More discrepancies are observed in the hedging efficiency among the power producers serving the Texas region.

Originality/value

This research provides important implications about the survivability and superiority of current and proposed standardized weather contracts and the design of effective standardized weather derivatives for the extant and potential weather markets.

Details

The Journal of Risk Finance, vol. 10 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

1 – 2 of 2
Per page
102050