Temperature Derivatives

Location - LAX, California

Buyer - XYZ Co. (paying fixed rate)

Seller - ABC Co. (paying floating rate)

Accumulation Period, January 2015

Tick Size - $5000 per HDD

SWAP fixed rate - 1000 HDD

Floating Rate - ?

Put option strike price - 1000 HDD

Payoffs at maturity - ? and who pays?

Suppose the temperatures in January / 2015 are 66 degrees in the first 10 days, 35 degrees in the next 10 days, and 15 degrees in the last 11 days of the month.

1. Compute the floating rate and determine the payoffs at maturity of a HDD swap contract. (Who pays and how much)

2. Determine the payoffs at maturity of a HDD put contract with strike price 1000 HDD.