The aim of this paper is to point out some problems of index estimation for the purposes of weather derivative valuation considering the particularities of agriculture. The assessment of the sensitivity of barley to weather over 40 years has been the basis for the design and valuation of weather...

In recent years , weather derivatives have become a common tool in risk management for many sectors. This has its roots in that there is no unique way to determine de value and price solutions that would be generally approved by market-participants, like in the case of the Black-Scholes formula...

Traditionally probability is considered as a function that takes values in the interval [0, 1]. However, researchers found that negative, as well as larger than 1 probabilities could be a useful tool in making financial modeling more exact and flexible. Here we show how larger than 1...

This paper explores the impact of volatility estimation methods on theoretical option values based upon the Black-Scholes-Merton (BSM) model. Volatility is the only input used in the BSM model that cannot be observed in the market or a priori determined in a contract. Thus, properly calculating...

This paper proposes the use of analytical approximations to price an heterogeneous basket option combining commodity prices, foreign currencies and zero-coupon bonds. The performance of three moment matching approximations is examined: inverse gamma, Edgeworth expansion around the lognormal and...

Log-normal process and martingale restriction bring some bias on the premium for option pricing models. It is possible to reduce the bias by adding more parameters like jump diffusion, stochastic volatility or regime switching. In this case closed form solutions and numerical approximations...

Basket options are among the most popular products of the new generation of exotic options. This attraction is explained by the fact that they can efficiently and simultaneously hedge a wide variety of intrinsically different financial risks. They are flexible enough to include all the risks...

We discuss the efficiency of the spectral method for computing the value of the European Call Options, which is based upon the Fourier series expansion. We propose a simple approach for computing accurate estimates. We consider the general case, in which the volatility is time dependent, but it...

In this paper, we address the mathematical analysis and numerical solution of a model for pricing a defined benefit pension plan. More precisely, the benefits received by the member of the plan depend on the average salary and early retirement is allowed. Thus, the mathematical model is posed as...

Price movements in many commodity markets exhibit significant seasonal patterns. In this paper, we study the effects of seasonal volatility on models’ option pricing performance. In terms of options pricing, a deterministic seasonal component at the price level can be neglected. In contrast,...