A methodology for temperature option pricing in the equatorial regions

Weather derivatives are financial instruments that can be used by organizations or individuals to hedge risks associated with adverse weather conditions. conditions directly decrease profits affecting the volume of sales costs. This paper develops a methodology for temperature option pricing in equatorial regions. In this approach, is forecast combining deterministic and stochastic models. We find forecasting daily model combines truncated third-order Fourier series mean reversion process proves most accurate options. The calibrated data gathered Bogotá, Colombia, using Monte Carlo simulations.