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3

Although the answer of @SRKX is right on spot, I was already writing a solution along the lines of how you had specifically approached the problem. I think it might still be useful to you, so here it goes The price of the chooser option, as seen of today $t=0$ is by definition \begin{align} V_0 &= \underbrace{e^{-r T_2}}_{\text{Payoff dicount factor}}...

3

You can refer to one of my previous answers here for a detailed development. There are actually two ways you can price this: - the price of a call plus a put with adjusted strike (like above) - a put plus the price of a call with an adjusted strike (like in my answer). The only difference is whether you do $\max( a, b ) = b + ( a - b )^+$, or \$\max( a, b ...

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Please note that this is subjective, but I hope it can help. I was told that Frozen Concentrated Orange Juice forward contracts (FCOJ) are used to have a proxy for weather risk. https://www.theice.com/products/30/FCOJ-A-Futures you can imagine have a look at other agricultural forwards, since for these kind of market, demand is linked to economy level (=...

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If you are looking for derivatives on weather (temperature, heating degree days, cooling degree days) and a financial "index", I think your best bet would be to look for hybrid weather/commodity derivatives.

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This is not a direct answer to your question as I am not sure whether the instrument you described exists, but OP would probably find the mathematics behind transmission congestion contracts very interesting. Transmission congestion contracts enable the hedging of fluctuations in electricity prices across the power grid, and are auctioned off by regional ...

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