Abstract
One of most distinguishing features of weather derivatives is that the market is incomplete This article presents a new method for pricing weather derivatives in an incomplete market. The proposed method has two advantages exhibited by only a few of models in other weather-related articles. First, the method for pricing assets in an incomplete market is employed to overcome the non-tradable feature of the underlying assets of the weather derivatives for which the no-arbitrage method breaks down. Second, an efficent analytical method is incorporated into the proposed model to make the Asian-type payout of weather derivatives much easier to evaluate than by other numerical methods. Pricing formulae and numerical results for weather derivatives other than weather options, including weather caps, weather floors, weather swaps and weather collars, are also presented.
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