Cracking the Climate Change Conundrum with Derivatives

Année de publication



Wilmott Journal 2 271 287 5


With short‐term and seasonal variations filtered out, the data for the climate is closer to stationary, predictable for some time in the future and can be approximated with a Markov process, thus demonstrating that climate and weather time series exhibit differing characteristics. Hence, based on statistical analysis of the temperature time series, we consider an Ornstein‐Uhlenbeck process for the dynamics of the global mean temperature and propose a realistic new semi‐empirical model for estimating the global sea level response. We then use the concept of absence of arbitrage opportunities and define a simple pricing rule with stochastic interest rates for evaluating climate derivatives. Finally, we discuss three financial products that enable different parties who feel vulnerable to climate change to hedge their risks or shoulder additional risks where a cost‐benefit advantage exists, and we describe their pricing formula. We first consider a digital coupon swap allowing two parties to bet on sea level rise at different fixing time and then introduce a climate default swap providing a party with protection against a rise in the sea‐level where the default is the first passage time of an up barrier. As a special case, we look at the pricing of a climate default bond or nature‐linked bond. Copyright © 2010 Wilmott Magazine Ltd.

Type de publication
  • journal
Type de document
  • article
Classification - Inist-CNRS
  • 1 - sciences appliquees, technologies et medecines
  • 2 - sciences exactes et technologie
  • 3 - sciences et techniques communes
  • 4 - sciences de l'information. documentation
Classification - Scopus
    Classification - Science Metrix
      Classification - Clarivate Analytics (Subject Category)
        Termes extraits

        level rise; wilmott; online; wilmott journal volume; rahmstorf; climate change; ipcc; brownian; derivative; climate default swap; special case; market price; climate derivatives; climate default bond; digital coupon swap; global temperature data; default; coupon; digital option; brownian motion; passage time; barrier level; baseline temperature; swap; global; global temperature; reference name; equivalent martingale measure; spot price; different parties; level process; arbitrage opportunities; markov process; base temperature; weather derivatives; present value; global warming; temperature increase; intergovernmental panel; dynamics; climate risks; temperature time series; daily temperature; climate change derivatives; other hand; cambridge university press; temperature process; extra noise; temperature risk; shore protection; model predictions; historical measure; historical data; nancial products; long term value; bond price; digital options; equity default swap; statistical analysis; level response; climate variability; temperature anomalies; recovery value; time densities; fourth assessment report; main focus; physical processes; global change; geophysical research letters; surface temperature time series; pricing

        Entité nommée
        Entité nommée - Emplacement géographique
        • UK
        • Yokohama
        • Japan
        • Tokyo
        • Chicago
        Entité nommée - Organisme
        • University of Oxford
        • National Aeronautics Space Administration
        • Research Institute for Global Change, JAMSTEC
        • IPCC
        • Silsoe Research Institute
        Entité nommée - Personne
        Bloch; Justin Bowles; Paul Wilmott; Nicole El Karoui; London School; Marie Curie; Mat Collins; N. El Karoui; James Annan; Monique Jeanblanc; Given; Mark Davis
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