Can we use the Black-Scholes-Merton model to value temperature options?
by Gunter Meissner; James Burke
International Journal of Financial Markets and Derivatives (IJFMD), Vol. 2, No. 4, 2011

Abstract: In 1973, Fisher Black, Myron Scholes and separately Robert Merton derived the Black-Scholes-Merton (BSM) model, which was rewarded the Nobel Prize in 1997. Despite its limitations, the model has survived until today as the dominant pricing model for standard and exotic European style options. The model owes its success to its simplicity, high intuition and versatility. Burn analysis, which is typically applied in practise to price temperature options, lacks a rigorous mathematical foundation and can lead to arbitrage opportunities. We find that the BSM model despite its limitations is an adequate pricing model, which is superior to Burn analysis.

Online publication date: Sat, 28-Feb-2015

The full text of this article is only available to individual subscribers or to users at subscribing institutions.

Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.

Pay per view:
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.

Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Financial Markets and Derivatives (IJFMD):
Login with your Inderscience username and password:

    Username:        Password:         

Forgotten your password?

Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.

If you still need assistance, please email