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Extensive Instrument Coverage
The @ENERGY/Weather's functions and templates value both standard and specialized weather derivative trades such as capped pay-outs, collars, knock-in and knock-out barrier options, digital options and swaps. The supported set of instruments (see Coverage) can be extended by combining and chaining functions to value complex transactions. FEA regularly expands instrument coverage and publishes new spreadsheet templates.
Historical Analysis and Monte Carlo Pricing Models
Weather instruments are valued using both historical analysis (Burn Analysis) and Monte Carlo simulation pricing models. Historical analysis uses past temperature data from specified months to generate a set of historical payoffs. The Monte Carlo method values the instrument by simulating daily temperatures, computing a composite of simulated payoffs, and then analyzing its statistical properties. Users can benchmark the results of one methodology versus the other.
Flexible Inputs
@ENERGY/Weather provides users with flexible inputs, including:
- Choose Heating Degree Days, Cooling Degree Days, Energy Degree Days or Growing Degree Days as the underlying asset.
- Specify a maximum payout for capped calls and puts.
- Set the base temperature for measuring degree days.
- Value customized collars and swaps with variable reset weights and call/put combinations.
- Derive model parameters from historical temperature data.
Comprehensive Results
Several price and risk measures can be calculated with a single function call. The scalar risk measures represent discrete changes in value rather than rates of change. The functions also return delta, gamma, and vega risk curves, which yield the true exposures to the entire price and volatility term structure (unlike traditional risk measures that represent spot exposures only), permitting precise hedging.
Calibration
@ENERGY/Weather calculates the mean reversion time, annual temperature drift, temperature curve and volatility curve based on historical data.
View the @ENERGY/Weather product profile .
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