| dc.description.abstract | Unfavorable weather raises cost of doing business around the world. According to the
CME Group, around 30 percent of gross domestic product (GDP) of the United States (US) is
affected by the weather. Only in the US total exposure to meteorological conditions accounts
for nearly USD 5.3 billion. In order to address those risks, a market for weather derivatives
emerged in 1996 which allows companies and individuals to use this financial instrument to
hedge against losses associated with volatile weather.
In this thesis, I examine the impact of unanticipated fluctuations in air temperature on
electricity prices to explore the relevance of weather derivatives for Norwegian companies. I
conduct a time series analysis on historical observations for air temperatures in Oslo, Norway,
along with the respective historical prices for electricity in the same area in order to either
prove or dismiss the causality between the two variables. The data for electricity prices is from
Nord Pool, while the series for air temperatures is from the Norwegian Meteorological
Institute (MET Norway). In case the causal relation exists, it would provide local enterprises
that are sensitive to air temperature fluctuations with a strong argument for using derivatives
issued on temperature-based indices to mitigate their weather-related risks.
My study proves the causality between the two variables: air temperatures and electricity
prices. In particular, it finds that warmer-than-expected winters cause the decline in electricity
prices presumably due to their effect on demand for power. This adversely affects utilities
which end up with selling less power.
In addition, there is the lack of academic works discussing the fast-growing market for weather
derivatives. This is explained by the fact that this market is just recently developed. This thesis
therefore aims at adding to the knowledge of weather-indexed instruments, and explicitly
underlines the importance of further research on this topic. | nb_NO |
