TL;DRAbstract
Up until now we have looked exclusively at individual weather contracts, and how to model and price them on a stand-alone basis. However, we saw in chapter 3 that, from a speculator's point of view, individual weather contracts are very risky investments. For swaps there is around a 50 per cent chance of losing money while for short options there is typically a 20 per cent to 40 per cent chance, depending on the location of the strike. The addition of risk loading can make these risks a little less severe, but these are still worse risks than even the lowest-rated junk bonds.
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Up until now we have looked exclusively at individual weather contracts, and how to model and price them on a stand-alone basis. However, we saw in chapter 3 that, from a speculator's point of view, individual weather contracts are very risky investments. For swaps there is around a 50 per cent chance of losing money while for short options there is typically a 20 per cent to 40 per cent chance, depending on the location of the strike. The addition of risk loading can make these risks a little less severe, but these are still worse risks than even the lowest-rated junk bonds.
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