Abstract
Many industries like energy, utilities, ice cream and leisure sports are closely related to the weather. In order to hedge weather related risks, they invest their assets with portfolios like option, coupons, future, and other weather derivatives. Among weather related derivatives, CDD and HDD index options are mainly transacted between companies. In this paper, the autocorrelation system of temperature will be checked for several cities in Korea and the parameter estimation will be carried based on the maximum likelihood estimation. Since the log likelihood increase as the number of parameters increases, we adopt the Schwarz information criterion .