Contracts Derivatives

Why do they call these contracts derivatives? Where is the plectrumality in these contracts? Weather derivatives structures usually used are: i) cap - a call resource; ii) Floor - a put option; iii) Collar - a put and a call option, usually with little or no premium; iv) Swap - a derivative with a profit and loss profile of a futures contract v) Digital option - an option that pays either a predetermined amount if acertain temperature or degree day level is reached, or nothing at all in other case. A business with digest exposure may choose to buy or grapple a futures contract, Which is equivalently to a swap such that one counterparty gets give if the degree Day over a specific menstruation are greater than the strike level, and the other party gets gainful if the degree day over that period are slight than the strike. A business may also choose to salvage an option. A heating oil retail merchant may spirit that if the winter is very cold they will have juicy revenues - so they might sell an HDD call. If the winter is very cold, the retailer can afford to write the option and pay bring out with higher than normal revenues. Weather trading is much incompatible than other found on the financial and commodity market. Firstly, thither is no tradable underlying instrument.

Trades are referenced to notional indexes, potentially of any weather variable, for any location, over any quantify period (Nicholls, 2005). Also, weather market combines characteristics of insurance and derivatives markets. Weather derivatives more often than not cover low-risk, high-probability occurrences like temperature fluctuations. Therefore, they differ from insurance contracts that protect policyholders against low-probability catastrophic storms (Ceniceros, 2006). A generic weather option can be formulated by specifying the following parameters (Alaton et al., 2002): 1)The contract type (call or put); and the contract period;Typical contracts are written on cumulative HDD/CDD structured by options,for a given period.HDD... If you call for to get a full essay, order it on our website: Orderessay

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