How to price weather derivatives and model temperature? What are the effects of global warming on temperature forecasting?
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- Master of Science 
This thesis investigates the complex relationship between the pricing of temperature weather derivatives with its underlying temperature, with a focus on how temperature can be modeled and the consequences of global warming in this niche options market. The research studied the different models available on the subject with the goal of finding a pricing model that fits temperature, and all the risks attached to it, into the pricing model. The classic option pricing models, such as Black and Scholes can’t be adopted as a key condition of their success is the negotiable nature of the underlying. Looking at what the literature offers, there are valid mathematical pricing models. However, they are very complicated, and not every organization that wants to adopt these hedging tools has the knowledge and capital to comprehend them. This is the reason the paper tries to use the payoff system, suggested on the Chicago Mercantile Exchange, the main source of the options with some modifications to make the pricing fit for programming. The paper adopts time series methods of research and is all carried out on R.
Masteroppgave(MSc) in Master of Science in Sustainable Finance, Handelshøyskolen BI, 2023