Abstract
Economic outcomes and weather conditions are closely related. Until CME started to release weather derivatives in 1997, industries used to purchase insurances or use other selling strategies to protect their profits from serious losses caused by adverse weather conditions. As the weather derivatives trading market developing, weather derivatives have become efficient hedging tools for companies to fight against weather risk. The thesis is based on Melanie Cao and Jason Wei's (2004) consumption-based pricing method. And it has two objectives. The first one is the comparison of the temperature modeling. We use the actual meteorological data to compute the residuals of the Campbell and Diebold's (2005) temperature model, and use p-value to test if the temperature model is good enough. Since the weather risk is one kind of quantity risk, the second goal is to combine consumption-based pricing method and quantity hedge. Then we contrast the modified pricing model to the previous one to prove the importance of the quantity hedge.