Application of the bootstrap method to pricing of weather derivatives in power systems

This paper proposes a bootstrap method for weather derivatives. The weather derivative is one of derivatives that avoid the profit drop due to the weather change of bad weather or abnormal climate. It aims at hedging a risk in a way that the profit is leveled. In Japan, power utilities have started to make a contract with gas utilities though banks or casualty insurance company. In this paper, the final price is investigated with the Dischel D1 model of temperature and the CDD (cooling degree days) index. The bootstrap method is proposed to evaluate the payout for the weather derivatives. It is useful for handling statiscal estimation. The proposed method is successfully applied to real data of temperature in Atlanta, GA, USA.