Current techniques of weather derivatives pricing emphasize actuarial mathematics over financial engineering. Primarily, this is because the market lacks depth and the underliers are not traded. Both factors tend to preclude the sort of replicating portfolio strategies on which financial engineering depends. In practice, to price a weather derivative, you use historical data to project what future weather may be like, perform some statistical analyses and discount back to today. That is what this book is about.

An introductory chapter introduces the markets. The next covers historical data gathering and cleaning. The authors then devote the next eight chapters to describe how to use that data to price and calculate factor sensitivities for temperature-based weather derivatives. Only one chapter delves into possible financial engineering methods, and half of this reviews basic concepts of financial engineering. The book closes with a nice chapter on financial risk management and another that looks at precipitation- or wind-based derivatives.

This is a practical book. It is not particularly technical. Even fairly non-quantitative professionals will follow most of its discussions. Large segments of the book are devoid of formulas. However, technical appendices do a good job of clarifying concepts.

The authors have conducted research in the field, so they are quite knowledgeable. They cite plenty of useful references. On the other hand, this is an emerging field, so many of the discussions have a tentative feel to them.