Suppose the temperature (Deg F) in Montpelier, VT, in the first week of February is as follows:

Temp/Day

S

M

T

W

T

F

S

Min

6

8

14

18

2

12

0

Max

37

20

37

22

39

38

20

Calculate the cumulative HDD at the end of the week.

Suppose a utility company in VT buys 1000 option contracts where each contract pays $20 for every cumulative HDD unit in excess over 210 F (i.e., there is positive payout at an attachment point of parametric trigger equaling 210F) to offset the costs of increase gas prices during the period, what is the payoff received by the utility company, if any?

Note that the call option in b. above has strike = 210. Suppose the 7-day cumulative HDD follows a distribution with mean 210F, and standard deviation 20F, what is the price of a single option contract if annual risk-free rate = 2.5%?

Question

Suppose the temperature (Deg F) in Montpelier, VT, in the first week of February is as follows:

Calculate the cumulative HDD at the end of the week.
Suppose a utility company in VT buys 1000 option contracts where each contract pays $20 for every cumulative HDD unit in excess over 210 F (i.e., there is positive payout at an attachment point of parametric trigger equaling 210F) to offset the costs of increase gas prices during the period, what is the payoff received by the utility company, if any?
Note that the call option in b. above has strike = 210. Suppose the 7-day cumulative HDD follows a distribution with mean 210F, and standard deviation 20F, what is the price of a single option contract if annual risk-free rate = 2.5%?

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