Exotic options: An examination on weather options

As a result of development of the options market, investors had had more information about products and accordingly their requests and needs have increased. These requests and needs whom standard option products are incapable to satisfy have an important role in arising of new generation options. Exotic options, which are described as new generation, are non-standard options which have some additional special conditions in order to be able to offer better service to individual investors and traded in over-the-counter markets. Exotic options carry with them some conditions which make them more flexible and appropriate for the needs of individual investors.Weather options being a type of exotic options purpose to enable companies to cover themselves against weather fluctuations. Weather options market, which started its trades as over-the-counter in 1997, achieved a strong growth.In this study, exotic option types which are most used and weather options are introduced. In application part, a strategy for hedging of weather risks whom an air carrier applied by using weather options is examined. For the examination, some indexes are prepared by the aid of 20 year datas and a strike value is determined as per these indexes. The strike value is compared with actual values at maturity and a conclusion is reached. Option is priced with Burn Analysis.Keywords: Exotic Options, Weather Options, Burn Analysis