Weather conditions can significantly influence economic activity, particularly in regions whose industries are sensitive to climate variability. Weather derivatives are financial instruments used by businesses to hedge losses or predict risk based on weather indexes such as temperature, rainfall, or other meteorological factors.

This project computes Cooling Degree Days (CDD) for Hawaii to analyze seasonal patterns and long-term trends due to its vulnerability to rising temperatures in important sectors such as tourism, agriculture, public health, and energy. A Monte-Carlo framework was used to generate simulated annual CDD values and estimate the expected payoff and price of a CDD-based call option. Sensitivity analysis was conducted on the option price with respect to varying strike levels and base temperatures.

As weather patterns become increasingly variable, weather derivatives play an important role in helping organizations manage uncertainty and maintain economic resilience.