METEO 460

Weather Risk and Financial Markets

METEO 460 Syllabus: Weather Risk and Financial Markets 

Department of Meteorology and Atmospheric Science
The Pennsylvania State University
University Park Campus 

Semester: Spring 2020

Credits: 3.0 

Instructor: Prof. Steven J. Greybush
618 Walker Building
[email protected] (Please include METEO 460 in the subject line of course-related email correspondence.) 

Teaching Assistant (TA): Kristina Rolph
408 Walker Building
[email protected] 

Course Information: 

Course Hours:
Tuesday and Thursday, 12:05 PM – 1:20 PM (lecture)
Wednesday and Friday, 10:10 AM – 11:00 AM (laboratory)

Course Location: 218 Hosler Bldg (lecture and Fri lab); 341 Deike Building (Wed lab)

Professor Office Hours: Friday 9:30 – 10:00 AM in 618 Walker

TA Office Hours: Wednesday 2:00 – 3:00 PM in 606B Walker 

Course Description: The course introduces students to the role that weather plays as a source of financial and operational risk for business, markets, and other institutions. It also introduces the tools and concepts for weather risk management - the insurance products, financial instruments, and decision tools that organizations use to manage, reduce, and transfer their weather-related risks. Major topics include: (i) The concept of risk and the role of weather as a driver of economic risk; (ii) Probabilistic approaches to weather forecasting; (iii) Techniques for valuation of weather derivatives; (iv) Links between weather and markets for energy and agricultural commodities; and (v) Management of catastrophic hurricane risks. Weekly assignments culminate in a major student project on weather risk management. 

Required Materials: None

Required textbooks: None

Recommended (not required) textbooks:

Internet materials and links: CANVAS 

Course Objectives: 

  1. To demonstrate familiarity with the role that weather plays as a source of financial and operational risk for business, markets, and other institutions.
  2. To demonstrate familiarity with the tools and concepts for weather risk management - the insurance products, financial instruments, and decision tools that organizations use to manage, reduce, and transfer their weather-related risks. 

Course Outcomes: 

  1. To demonstrate knowledge of the concept of risk and the role of weather as a driver of economic risk.
  2. To demonstrate knowledge of the methods for probabilistic approaches to weather forecasting.
  3. To demonstrate knowledge of the techniques for valuation of weather derivatives.
  4. To demonstrate the ability to apply links between weather and markets for energy and agricultural commodities and management of catastrophe insurance. 

Prerequisites: 

  • Meteorology Prerequisite: Meteo 411
  • Statistics Prerequisite: Stat 301 or Stat 401 or EBF 472
  • Energy, Business, and Finance Prerequisite: EBF 301 or EBF 473 

Note: Meteo 460 is an elective course for undergraduate Meteorology majors. 

Students who do not meet the prerequisites may be dis-enrolled during the first 10-day free add-drop period after being informed in writing by the instructor (see:  http://www.psu.edu/dept/oue/aappm/C-5.html).  If you have not completed the listed prerequisites, then consult with the instructor.  

Overview: 

This capstone course in the Weather Risk option offers the student numerous opportunities to integrate their foundational knowledge of economics, statistics and the atmosphere to the practical challenges of making money in the market place. The semester-long trading projects provide a continuous learning experience where weather models and quantitative business analyses are used routinely to gain measurable skill in weather risk management.  Likewise, the various forecasting exercises are designed to expose students to a variety of medium range weather forecasting challenges they may reasonably encounter working in the weather risk field. 

The class will be supplemented by guest lectures.  This material is testable. 

Students should expect to immerse themselves in following the day-to-day weather.  A great resource for this is the Penn State E-Wall (http://mp1.met.psu.edu/~fxg1/ewall.html).

Aspiring forecasters may wish to participate in WxChallenge, the National Forecasting Contest.

Students are encouraged to attend the weekly Ken Reeves Memorial Weather Briefing. 

Assessment Tools: 

Required written/oral assignments 

There will be numerous projects / assignments / assessment activities throughout the semester.  These may include: 

  • Weekly trading meetings and exercises (during the “laboratory” portion of the course).
  • Twice-weekly forecasting assignments.
  • A project involving catastrophe risk modeling and insurance.
  • Class participation through small homeworks, quizzes, and active participation in discussions. 

For assignments / projects, unless otherwise stated there will be an immediate 25% penalty for any lab handed in late, a 50% penalty after six hours, and no credit will be given for assignments handed in after the start of the next class.  Professor maintains the right to decline acceptance of a late assignment beyond a certain time.  Neatness, organization, technical soundness, spelling and grammar are important.  While students may consult with their classmates on these assignments, the final product should represent the student’s own work. 

Examination Policy 

Two midterm exams will be given.  These will be closed-book, individual written assessments.  There will be no final exam. 

Grading Policy 

  • Exam 1 25%
  • Exam 2 25%
  • Forecasting Exercises 15%
  • Trading Exercises 15%
  • Insurance Risk Project 10%
  • Attendance / Participation 10% 

Attendance and Participation: Students are required to attend class (both lectures and labs) and participate in all exercises.  Active, thoughtful contributions to class discussions are encouraged. 

Schedule:

  • Week 1 Jan 14, 16
  • Week 2 Jan 21, 23
  • Week 3 Jan 28, 30
  • Week 4 Feb 4, 6
  • Week 5 Feb 11, 13
  • Week 6 Feb 18, 20
  • Week 7 Feb 25, 27
  • Week 8 Mar 3, 5 In-class Exam Mar 5
  • Holiday Mar 10, 12 Spring Break
  • Week 9 Mar 17, 19
  • Week 10 Mar 24, 26
  • Week 11 Mar 31, Apr 2
  • Week 12 Apr 7, 9
  • Week 13 Apr 14, 16
  • Week 14 Apr 21, 23 In-class Exam Apr 21
  • Week 15 Apr 28, 30 Guest Critique

Regular Add / Drop Deadline is Jan 18, Late Drop Deadline is Apr 10.

There is no Final Exam during exams week (May 4 – 8). 

The course content, topics, and timeline listed here is intended as a guideline, and is subject to modification by the instructors.

Course content: Weeks / Topics  

  • 1-3
    • Introduction to risk definition and terminology.
    • Forecasting process and requirements.
    • Market analysis and trading basics.
  • 4-6
    • Options and derivatives.
    • Weather data and quality review.
    • Numerical Weather Prediction and Probabilistic forecasting.
  • 7-8
    • Model Output Statistics and Statistical Postprocessing
    • Wind and Renewables / Wind Forecasting
    • Commodities and Weather Risk
  • 9-10
    • Weather and Insurance
    • Reinsurance
    • Indices and Cat Bonds
    • 11-12
      • Atmospheric Indices and Teleconnections
      • Extended Range Statistical Forecasting
    • 13-15
      • Weather Risk and Retail
      • Forecast Verification
      • Communicating with Stakeholders 

Lecture notes will often be placed on CANVAS (https://canvas.psu.edu), although students are ultimately responsible for their own note-taking.  Course content subject to change. 

Attendance Policy: Students who miss class for legitimate reasons will be given a reasonable opportunity to make up missed work, including exams and quizzes.  Students are not required to secure the signature of medical personnel in the case of illness or injury and should use their best judgment on whether they are well enough to attend class or not; the University Health Center will not provide medical verification for minor illnesses or injuries. Other legitimate reasons for missing class include religious observance, military service, family emergencies, regularly scheduled university-approved curricular or extracurricular activities, and post-graduate, career-related interviews when there is no opportunity for students to re-schedule these opportunities (such as employment and graduate school final interviews).  Students who encounter serious family, health, or personal situations that result in extended absences should contact the Office of Student and Family Services for help: http://studentaffairs.psu.edu/familyservices/.  Whenever possible, students participating in University-approved activities should submit to the instructor a Class Absence Form available from the Registrar's Office: http://www.registrar.psu.edu/student_forms/, at least one week prior to the activity. This course abides by the Penn State Attendance Policy E-11: http://undergrad.psu.edu/aappm/E-11-class-attendance-effective-fall-2016.html, and Conflict Exam Policy 44-35: http://senate.psu.edu/policies-and-rules-for-undergraduate-students/44-00-examinations/#44-35. Please also see Illness Verification Policy: http://studentaffairs.psu.edu/health/welcome/illnessVerification/, and Religious Observance Policy: http://undergrad.psu.edu/aappm/R-4-religious-observances.html. 

Academic Integrity Statement: Academic integrity is fundamental not only to one’s experience at the university, but remains essential throughout one’s career.  Students are not to receive unauthorized assistance on any course examinations or individual assessments.  Students are not to misrepresent the work of others as their own.  Serious offenses may warrant a zero on the assignment or assessment. 

Students in this class are expected to write up their problem sets individually, to work the exams on their own, and to write their papers in their own words using proper citations.  Class members may work on the problem sets in groups, but then each student must write up the answers separately.  Students are not to copy problem or exam answers from another person's paper and present them as their own; students may not plagiarize text from any sources (e.g. papers or solutions or websites) written by others.  Students who present other people's work as their own will receive at least a 0 on the assignment and may well receive an F or XF in the course.  Please see: Earth and Mineral Sciences Academic Integrity Policy: http://www.ems.psu.edu/current_undergrad_students/academics/integrity_policy, which this course adopts.  To learn more, see Penn State's "Plagiarism Tutorial for Students." 

If in doubt about how the academic integrity policy applies to a specific situation, students are encouraged to consult with the professor or TA. 

Course Copyright: All course materials students receive or to which students have online access are protected by copyright laws. Students may use course materials and make copies for their own use as needed, but unauthorized distribution and/or uploading of materials without the instructor’s express permission is strictly prohibited.  University Policy AD 40, the University Policy Recording of Classroom Activities and Note Taking Services addresses this issue. Students who engage in the unauthorized distribution of copyrighted materials may be held in violation of the University’s Code of Conduct, and/or liable under Federal and State laws.   For example, uploading completed labs, homework, or other assignments to any study site constitutes a violation of this policy. 

Weather Delays and Campus Emergencies: Campus emergencies, including weather delays, are announced on Penn State News: http:/news.psu.edu/ and communicated to cellphones, email, the Penn State Facebook page, and Twitter via PSUAlert (Sign up at: https://psualert.psu.edu/psualert/). Students will not be required to attend class if campus is closed during any part of the scheduled class time. 

Accommodations for students with disabilities: Penn State welcomes students with disabilities into the University's educational programs. Every Penn State campus has an office for students with disabilities. The Office for Disability Services (ODS) website provides contact information for every Penn State campus: (http://equity.psu.edu/student-disability-resources/disability-coordinator). For further information, please visit the Office for Disability Services website (http://equity.psu.edu/student-disability-resources). 

In order to receive consideration for reasonable accommodations, you must contact the appropriate disability services office at the campus where you are officially enrolled, participate in an intake interview, and provide documentation: http://equity.psu.edu/student-disability-resources/applying-for-services. If the documentation supports your request for reasonable accommodations, your campus’s disability services office will provide you with an accommodation letter. Please share this letter with your instructors and discuss the accommodations with them as early in your courses as possible. You must follow this process for every semester that you request accommodations.

Disclaimer Statement: Please note that the specifics of this Course Syllabus can be changed at any time, and you will be responsible for abiding by any such changes. Changes will be posted to the course discussion forum. 

Acknowledgements: We would like to thank previous instructors of Meteo 460, including Dave Titley and Paul Knight, for their contributions to the development and structure of this course.