Peer group analysis for introducing weather derivatives for a city

• In order to introduce weather derivatives for a city, we use a peer group analysis.
• We utilize weather derivative of peer cities that have similar weather.
• We find out that CDD, HDD future and seasonal strips are applicable.
• We propose the method to set the prior settlement price of each weather derivative.

Due to changes in global climate, infrastructure damage caused by extreme weather has been increasing worldwide, and Korea also has not escaped such damage. Countries such as the United States, Japan, Canada and Australia have introduced weather insurance and derivatives in order to hedge potential risks of damage caused by climate change. Korea has also introduced weather insurance, but weather derivatives have not yet been introduced. In this paper, we do the research for introducing weather derivatives for Seoul, Korea. Weather derivatives need to reflect the climatic conditions of the region. In this paper, we apply a peer group analysis to introduce weather derivatives for Seoul, Korea, based on the climatic conditions of the region. In addition, we propose a simple pricing method for the weather derivative using both historical weather data of Seoul and its peer cities. Our study results can help other cities who want to introduce weather derivatives for them.