The main objectives of this paper are to measure weather-risks in Korean city-gas industry, whose revenue is strongly correlated with temperature changes, and show how managing weather-related risks using weather derivatives (priced using a utility indifference pricing technique) affects Korean city-gas industry's volatility of cash-flow through computational tests.
Since the fluctuation in temperature is the major risk factor for Korean city-gas providers (who are mostly nongovernmental companies), they can considered as strong potential participants in weather-derivatives' market. Therefore, it is worthwhile to investigate the impact of temperature changes on city-gas demands and the effectiveness of the application of weather-derivatives to city-gas providers' revenue. Our tests indicate that hedging weather-risks using weather derivatives can not only reduce the volatility of cash-flow but also increase cash income for Korean city-gas providers.
