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.
