Hedging Against the Weather Risk in a Selected Entity

Abstract

This Master’s thesis deals with the issue of weather derivatives and the associated risk in the form of unfavourable average air temperatures. The theoretical part is elaborated with the help of literature and scientific articles. The first part of the thesis explains the notion of risk and hedging, and discusses the characteristics of different types of derivatives, including exotic options, which is where weather derivatives fall. In the practical part, the relationship between average temperature and attendance at a particular zoo is assessed, selected methods for valuing selected derivatives are applied, and the hedged and unhedged option strategies are evaluated in the conclusion of chapter four.