METEO 460-Weather Risk and Financial Markets

Instructor: David W. Titley TA: Amanda Walker 11:15-12:30pm on Tues/Thurs in Rm 2 Deike Bldg. Lab meets Wed 10:10-11am/Fri 10:10-11am both in Rm 126 Walker Bldg

Penn State METEO 460
Weather Risk and Financial Markets
Spring 2016 

Summary:   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. The course emphasizes practical forecasting exercises, simulated commodities trading, and communications of weather risk to non-meteorologists.

Instructor:

Teaching Assistant: 

Pre-requisites:  METEO 411;E B F 472 or STAT 301 or STAT 401;E B F 301 or E B F 473

Students who do not meet these prerequisites after being informed in writing by the instructor may be dis-enrolled during the first 10-day free add-drop period according to Administrative Policy C-5. If you have not completed the listed prerequisites, then promptly consult with the instructor if you have not done so already. Students who re-enroll after being dis-enrolled according to this policy are in violation of Item 15 on the Student Code of Conduct.  Any questions on pre-requisites, please contact the instructor immediately.

Course Schedule: Class meets from 11:15-12:30pm on Tues/Thurs in Rm 2 Deike Bldg. Lab meets Wed 10:10-11am/Fri 10:10-11am both in Rm 126 Walker Bldg. 

Recommended (not required) textbooks:

Wilkes, D.S., Statistical Methods in the Atmospheric Sciences, 3rd Ed. Academic Press, 2011. http://www.amazon.com/Statistical-Atmospheric-Sciences-International-Geophysics/dp/0123850223/ref=sr_1_1?s=books&ie=UTF8&qid=1452599077&sr=1-1&keywords=wilks+statistics

McLean, B., The Smartest Guys in the Room:  The Amazing Rise and Scandalous Fall of Enron, 2004 http://www.amazon.com/The-Smartest-Guys-Room-Scandalous/dp/1591840538 (for extra credit)

Course Policies: 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.Here are the components (both for assessment and team work) of the class:

  1. Weekly trading meetings – starting with mechanics the Wednesday and Friday Labs the week of 19 January.
  2. Jan 19 - March 3 – submission of business and weather stories (URLs) by Monday midday (for selective inclusion in that week’s Market Analysis) – send to [email protected] (use search engine for: weather and business stories).  Use the subject heading “METEO 460 NEWS:”
  3. Training for MARKET ANALYSIS for class and “Up In The Air” (UPA) production (Feb 23 – April 12). This will consist of a 3-5 minute presentation to the class (and a video submission to UPA) concerning the current market and expected weather effects on each Tuesday
  4. Weekly Heating Degree Day (HDD) forecasting contest starting 00Z 26 January and ending 00Z 29 March. This consists of a weekly probability distribution of the 7-day cumulative heating degree-days at two major cities key to NatGas consumption (EWR and DFW). The forecasts will be submitted by 00Z Tuesdays (Monday evening ET).
  5. Weekly Maximum Temperature forecasting contest starting 00Z 29 January and ending 00Z 31 March.  We will be forecasting the highest max temperature for Melbourne Australia (Olympic Park) for the following Sunday – Tuesday (Melbourne time).  The forecasts will be submitted by 00Z Fridays (Thursday evening ET).
  6. Weekly significant wave height forecasting contest for the Gulf of Mexico at buoy location 42055 in the western Gulf starting 00Z 26 January and ending 00Z 29 March.  You will forecast the highest observed significant wave height for a six-hour period between 21Z Wednesday – 03Z Thursday for that week (aka Wednesday evening local time).  The forecast will be submitted by 00Z Tuesdays (Monday evening ET). 
  7. Hourly Wind Forecast for ABI (4 weeks) starting 5 April and ending 19 April. These will be submitted in a similar way to the HDD.
  8. CAT Risk Exercise – an assessment of property risk of hurricanes due on April 14.
  9. Extra Credit option for reviewing ‘The Smartest Guys in the Room’ (Enron) – due 21 April (optional).
  10. Class participation through small homeworks, and quizzes.
  11. One in-class mid-term.
  12. One final exam in finals week.
  13. Guest lecture material is testable.

Grading:

  • 35% Tests
    • 15% Mid-term
    • 20% Final (Cumulative)
  • 25% Forecasting Exercises
    • 5% each HDD EWR, HDD DFW, T_Max3 Melbourne, Sig_Wv buoy 42055, hourly ABI wind
  • 20% Trading Sessions
  • 10% Up in the Air Presentation
  • 10% Participation (small homeworks, quizzes, weather risk story submissions)

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  • 05% Extra Credit – (pick Project (1) or (2).  Only one will count for credit).

Project (1):  900 – 1000 word review of Enron based on the recommended book “The Smartest Guys in the Room” (there is also a movie by the same name).  Include an analysis of why Enron went bankrupt; what advances Enron brought to the Weather Risk field, and lessons learned for today’s weather risk traders.  

Or…

Project (2):  Start collecting daily North American Ensemble Forecast System (NAEFS) 8-14 day temperature output for North America http://www.cpc.ncep.noaa.gov/products/predictions/short_range/NAEFS/poeabn_h264.00.gif 19 January - 15 April.  Verify the output and provide me with an 800-1000 word analysis of its strengths and weaknesses.  Explain how you verified the output and why use selected that verification system.  Give some examples of how you might use this model output product in a weather risk application.

Academic Integrity

Students in this class are expected to write up their problem sets individually, to work the exams on their own, (and for the extra credit section) 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 papers 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 the Earth and Mineral Sciences Academic Integrity Policy, which this course adopts.

To learn more, see Penn State's "Plagiarism Tutorial for Students."

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.

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. For further information, please visit the Office for Disability Services website.

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 based on the documentation guidelines. 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.

Attendance

This course abides by the Penn State Attendance Policy E-11 and Conflict Exam Policy 44-35. Please also see Illness Verification Policy, and Religious Observance 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, family emergencies, and regularly scheduled university-approved curricular or extracurricular activities. 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. Whenever possible, students participating in University-approved activities should submit to the instructor a Class Absence Form available from the Registrar's Office, at least one week prior to the activity.

Weather Delays

Campus emergencies, including weather delays, are announced on Penn State News and communicated to cell phones, email, the Penn State Facebook page, and Twitter via PSUAlert (Sign up at: https://psualert.psu.edu/psualert/.)

Penn State E-mail Accounts, Learning Management System and Social Media

All official communications from Penn State are sent to students' Penn State e-mail accounts. Be sure to check your Penn State account regularly, or forward your Penn State e-mail to your preferred e-mail account, so you don't miss any important information.

METEO 460 has shifted from ‘ANGEL’ to ‘Canvas’ learning management system.  http://canvas.psu.edu/students/ Please become familiar with this link.

You will require a Facebook account to participate in the Commodity Trading portion of this course.  See the instructor immediately if you do not have a Facebook account.

Deferred Grades

If you are prevented from completing this course within the prescribed amount of time, it is possible to have the grade deferred with the concurrence of the instructor. To seek a deferred grade, you must submit a written request (by e-mail or U.S. post) to your instructor describing the reason(s) for the request. It is up to your instructor to determine whether or not you will be permitted to receive a deferred grade. If, for any reason, the course work for the deferred grade is not complete by the assigned time, a grade of "F" will be automatically entered on your transcript.

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.

Week / Date / Lecture topic(s) / Guest Lecturer / Notes

  • Week 1
    • 12 Jan / Intro/Forecasting Requirements / Canvas LMS
    • 14 Jan / Probability Review / Risk Definition & Terminology
  • Week 2 
    • 19 Jan / Econ Review / Market Terms / Derivatives & Options / 
      • Forecasting Practice Week/
      • Commence Lab sessions
    • 2/ 20 Jan / First Natural Gas Trading Lab (Wednesday)
    • 2 / 21 Jan / Weather Data quality review/ 
      • Natural Gas Trading Starts 09:00 ET 
    • 2 / 22 Jan / First Soybean Trading Lab /
      • Soybean Trading Starts 20:00 ET Friday
  • Week 3
    • 25 Jan / Forecasting Exercises Start / Monday                                                    
    • 26 Jan / Statistics Review
      • Training for Up in the Air (Pattee Library) 
    • 28 Jan / Soybeans & the Market / Katelyn Johnson, MARS team 
  • Week 4
    • 2 Feb / Atmospheric Indices I 
    • 4 Feb / “Buying Better Weather” / Dr. John Dutton
  •  Week 5
    • 9 Feb / Atmospheric Indices II
    • 11 Feb / “Flying Big Jets” / Dr. John Dutton 
  • Week 6 
    • 16 Feb / Ocean Indices / MJO
    • 18 Feb / Burn Analysis / Market Analysis
  • Week 7 
    • 23 Feb / Technical Analysis / 
      • Up in the Air – Market Analysis Team 1
    • 25 Feb / NOAA Organization / NWS/NCEP/CPC TBD
  • Week 8
    • 1 Mar / NOAA NESDIS / NCEI /
      • Up in the Air – Market Analysis Team 2 
    • 3 Mar / Forecast Verification
    • 7-11 Mar Spring Break / No forecasting / Trading optional
  • Week 9
    • 15 Mar / Goodness (the Value) of Forecasts /
      • Up in the Air – Market Analysis Team 3
    • 17 Mar EXAM I
  • Week 10
    • 22 Mar Statistical Forecasting I
      • Up in the Air – Market Analysis Team 4 
    • 24 Mar / Statistical Forecasting II
  • Week 11
    • 29 Mar / Wind & Renewables / Wind forecasts/
      • Up in the Air – Market Analysis Team 5
      • Last week for HDD/Melbourne Forecasts
    • 31 Mar / Long Range S2S Forecasts / Mr. Paul Knight
  • Week 12
    • 5 Apr / Weather Insurance I (Indices) /
      • Start ABI Wind Forecasts Monday
      • Up in the Air – Market Analysis Team 6
    • 7 Apr / Weather Insurance II (CAT Bonds)
  • Week 13
    • 12 Apr / Communications Forecasts – and your Value Proposition /
      • Up in the Air / Market Analysis Team 7
    • 14 Apr / Retail / Housing Weather Risk
    • 15 Apr / Natural Gas Trading Closes
      • Soybean Trading Closes Friday
  • Week 14
    • 19 Apr National Security / Emergency Management Wx Risk /
      • ABI Wind and GOM sig Wave Forecasts end this week /
      • Up in the Air – Market Analysis Team 8 (if needed)
    • 21 Apr / Maritime Weather Risk /
      • Extra Credit (Optional) Paper Due
  • Week 15
  • 26 Apr / Guest Critique (Business Casual) – TBA / Constellation
  • 28 Apr / Guest Critique (Business Casual) – TBA / MARS
Finals Week       TBD                       Final Exam (Cumulative)