Pricing the haze option with the PM2.5 index

We price the haze option with the PM(2.5)index under various conditions and discuss its characteristics with some numerical examples. The effect of air pollution in the environment is becoming a growing issue. In the areas of finance and tourism, there have been few studies on the effects of air pollution, such as the haze caused by PM2.5, which are tiny particles in the air that reduce visibility and cause the air to appear hazy when levels are elevated. In order to reduce financial losses and economic impacts, our main contribution is that we focus on the issue of the haze option and establish a feasible payment mechanism for the haze option against economic loss from air pollution. This idea of financial product can be applied easily to other issues, such as weather options in the area of tourism or traffic. In our observation data, the underlying PM(2.5)air pollution index changes according to specific seasons year by year in Taiwan, and the distribution of the air pollution PM(2.5)index doesn't follow a fixed stochastic probability model. We use the nonparametric block bootstrap simulation method to price the haze option under our research process. From our numerical results, we provide a good reference by which to satisfy the needs of consumers through the discussion of numerical examples. The results can also be applied in government medical policies to reduce the economic effects of air pollution that damages people's health and can be used to support the development of tourism. (C) 2018 College of Management, National Cheng Kung University. Production and hosting by Elsevier Taiwan LLC. All rights reserved.