Sep 2, 2013

Financial Engineering of Climate Uncertainty

The climatic condition influences and determines the various sectors in the economy. The emergence of weather derivatives in the financial market is the most palpable reflection of this reality. Derivative contracts climate use climate measures, analogous to the target asset for the pricing.

An institution that wishes to eliminate the risk of a given weather event, such as a period with little/excessive rain or temperature can purchase weather derivatives contracts, adjusting the unfavorable weather conditions to the estimated lost value and the return of the contracts.

Likewise these contracts are used to reduce portfolio risk in exposed weather events, are also used for speculation or strategic asset allocation.

The dependence on weather events encourages extensive use of meteorological models for pricing these instruments.

On Weather Forecast for Weather Derivatives, the author argues in favor of forecasting weather time series for pricing weather derivatives, suggesting that climatic time series contain information relevant to the pricing of these instruments.

Below I cite other studies, news and videos on the subject of Climate Derivatives for anyone interested in deepening.

CME articles:

Academic articles:


Come rain or shine – the economist

Buying a financial umbrella – the economist

Video 01 - CME's Andriesen Discusses Weather Derivatives, Customers

Video 02 - Bob's Buzzword of the Day: `Weather Derivatives'

Video 03 - Weather Risk | Certified Hedge Fund Professional (CHP)

Rodrigo Sucupira Rodrigo Sucupira
Rodrigo is a Automation and Control Engineer - Escola Polit├ęcnica / USP. Interested on Financial Engineering, writes articles about Finance and Technology.
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