Weather option pricing is often based on historical observations taken from first-order stations of the US National Weather Service (NWS). Over time, however, many changes have occurred at these stations with regard to location, elevation, instrumentation, and observation practice, and in their surroundings, e.g., the urban heat islands (Guttman 1991). As a result of such changes, climate data records exhibit trends and biases that are practical considerations in a nascent weather derivatives market (Portman 1999). Analysts suggest that lack of agreement on how to handle data issues has led in part to uncertainties in pricing, and has resulted in wide bid-offer spreads and low market liquidity (see Stavros 1999).
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