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:
Introduction to Weather Derivatives - CME Group
Academic articles:
News:
Come rain or shine
– the economist
Buying a financial umbrella – the economist
UBS to launch global warming derivatives index – Financial Times
Sun shines again on weather derivatives – Financial Times
CME Targets Growth In Weather Derivatives – WSJ – June - 2006
No Snow, No Problem: How Wall Street Profits from Weird Weather - Time Bussiness and Money
Banking On The Weather This booming
derivatives market gives new meaning to rainy-day funds. - CNN Money
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)
