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Topic: Weather derivatives

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  Weather derivatives - Encyclopedia, History, Geography and Biography
Weather derivatives are financial instruments that can be used by organisations or individuals as part of a risk management strategy to reduce risk associated with adverse or unexpected weather conditions.
The difference to other derivatives is that the underlying asset (rain/temperature/snow) has no direct value to price the weather derivative.
Farmers can use weather derivatives to hedge against poor harvests caused by drought or frost, theme parks may want to insure against rainy weekends during peak summer seasons, and power companies may use heating degree days (HDD) contracts to smooth earnings.
www.arikah.net /encyclopedia/Weather_derivatives   (298 words)

 International Task Force on Commodity Risk Management | FAQs   (Site not responding. Last check: 2007-11-02)
A weather index is developed by evaluating historical weather data and determining if this data has a correlation to crop yields.
Weather risk management products can be used for any crop or productive activity whose yields/payouts are correlated to the weather.
Weather risk management contracts can be written by a variety of groups, including insurance companies, local banks, and agricultural input providers, among others.
www.itf-commrisk.org /itf.asp?page=48   (1589 words)

 :: Quantnotes.com :: Fundamentals ::
A weather derivative can be written on many different parameters, such as, temperature, rain and snowfall measured at some mutually agreed weather station (e.g.
The main difference between a weather derivative and contract insurance is that the holder of an insurance contract has to prove that he or she has suffered financial loss as a result of the weather in order to be compensated.
Weather derivative payouts are depend solely on the outcome of the weather, regardless of how if affects the holders profits.
www.quantnotes.com /fundamentals/weatherderivatives/weatherderivatives.htm   (573 words)

 TheManageMentor - Knowledge Universe - Finance - Weather Derivatives -- Volume risk management tool
Similarly, weather derivatives are financial instruments that cater to stabilise volatility in revenue and expenses, caused by unpredictability of weather conditions.
Weather Derivatives are similar to other traditional financial derivatives like futures, forwards and options except in terms of underlying variables.
Weather derivative products are becoming an integrated aspect of risk management for utilities, retailers, agriculture, municipalities, insurance companies, beverage companies and a variety of manufacturers.
www.themanagementor.com /kuniverse/kmailers_universe/finance_kmailers/IF_Weather.htm   (747 words)

 Weather Derivatives Market
Variability in weather conditions had always been recognized as one of the most significant factors affecting energy consumption, however the effects of unpredictable seasonal weather patterns had previously been absorbed and managed within a regulated, monopoly environment.
The early market participants saw weather derivatives as both a mechanism to hedge inherent weather exposure in their core energy assets and other energy commodity trading operations as well as a new risk management product to offer to regional utilities and other energy concerns alongside the array of structured products they were already providing.
First, there was a close similarity between weather derivatives and traditional “mother nature” insurance products covering property damage and business interruption, and second there was a strong overlap between the skills needed to participate in the weather market and the insurance industry’s core actuarial and risk management expertise.
www.climetrix.com /WeatherMarket/MarketOverview   (1339 words)

 ABN Amro working on weather derivatives plan
But trading in weather derivatives is yet to receive a formal nod from the government.
Weather derivatives are a cheaper alternative to insurance and can tide over the cyclical weather-related risks.
In the US and in Europe, weather derivatives are a booming market as farmers, agri-companies and utilities alike buy these contracts to protect themselves from the fickle weather.
www.rediff.com /money/2003/jul/21abn.htm   (502 words)

 Hurt by weather? Try derivatives
"Weather derivatives ensure that corporates are in a position to meet investor expectation and deliver profits by meeting their cash flows even in the face of bad weather," said Peter Brewer, director (environmental financial products), Rabobank International.
Weather derivatives are a cheaper alternative to insurance and can tide over the cyclical weather-related risks, said a senior corporate executive in the food industry.
The cost of a weather derivative depends upon the probability of adverse impact on account of the weather, and the duration of the contract signed between the bank and the corporate entity.
www.rediff.com /money/2004/dec/23perfin.htm   (813 words)

 SSRN-Weather Forecasting for Weather Derivatives by Sean Campbell, Francis Diebold
Weather derivatives are a fascinating new type of Arrow-Debreu security, making pre-specified payouts if pre-specified weather events occur, and the market for such derivatives has grown rapidly.
Weather modeling and forecasting are crucial to both the demand and supply sides of the weather derivatives market.
The vast majority of extant weather forecasting literature has a structural "atmospheric science" feel, and although such an approach may be best for forecasting six hours ahead, it is not obvious that it is best for the longer horizons relevant for weather derivatives, such as six days, six weeks, or six months.
papers.ssrn.com /sol3/papers.cfm?abstract_id=284950   (488 words)

 Weather derivatives based on reliable long-range forecasting
Weather Trades, Inc. is division of Freese-Notis Weather.
Up until very recently, businesses that were particularly sensitive to weather uncertainties had very few options to choose from with regards to hedging weather risk.
Weather derivatives can theoretically be designed for almost any weather variable (rain, snow, wind, etc.), though most of the activity so far has centered around long-range (seasonal) temperature forecasts.
www.weathertrades.com /dx.html   (269 words)

 Environmental Finance - Weather Risk - October 2004
Weather risk management may not have become as ubiquitous as some predicted when the market was born in 1997, but the past five years have none the less seen dramatic growth.
Lynda Clemmons, who set up Enron’s weather desk earlier that year, says that the company first began considering a traded market in weather risk when it was conducting due diligence on an Oregon-based utility that was highly exposed to fluctuations in the weather.
For others, hedging weather incurs a cost that they have not had to bear before — which was especially unappealling during the global economic downturn that followed the bursting of the dot.com bubble.
www.environmental-finance.com /2004/0410oct/weather.htm   (2580 words)

 RIMS | Archive
Weather derivatives are traded on the Chicago Mercantile Exchange (CME), the London International Financial Futures Exchange and the Helsinki Exchanges, with futures and options exchanges in other countries also seriously considering this innovation.
This embryonic OTC market for weather derivatives languished until 2001 when the Chicago Mercantile Exchange introduced exchange-traded weather derivatives (both futures and options) which created the liquidity, price transparency and counterparty certainty that the market needed to be viable.
Weather derivatives will continue to expand in Asia and Australia, as well as in the strongholds of Europe and the United States.
www.rmmag.com /MGTemplate.cfm?Section=MagArchive&template=/Magazine/ArchiveDisplayMagazines.cfm&IssueID=195&AID=2076&Volume=50&ShowArticle=1   (687 words)

 USATODAY.com - Playing the weather game   (Site not responding. Last check: 2007-11-02)
Weather forecasting has improved enough — and the stakes have shot up enough — that companies no longer accept the weather as a pure gamble.
National Weather Service director Jack Kelly says today's 3-day forecast is as accurate as the 24-hour forecast of 20 years ago because of computer models that can map out where high pressure and storm systems will be weeks in advance.
They use the government data collected at 8,000 sites, then employ their sophisticated computers and software to focus on a single weather challenge, such as ice on a stretch of highway or a heat wave in a major city where the accuracy stakes are highest.
www.usatoday.com /weather/news/2001/2001-12-11-weatherderivatives.htm   (1518 words)

 USATODAY.com - How weather derivatives work   (Site not responding. Last check: 2007-11-02)
They believe they understand the probabilities of weather and are willing to wager just as a football fan might bet against a football team because he believes the quarterback is injured.
Derivatives are commonly used to avoid fluctuations in interest rates or foreign currencies.
Aquila predicts $50 billion in weather derivative contracts by 2005, while the value of all derivatives traded worldwide is $100 trillion.
www.usatoday.com /weather/news/2001/2001-12-11-weatherderivativesqa.htm   (480 words)

 Weather Derivatives - Introduction
The weather derivatives market was developed in response to the deregulation of the Power Industry.
Now forced to manage their exposures, these companies needed a financial vehicle to help manage their weather risk.
The use of weather derivatives can help to reduce the impact that adverse weather may have on your company's bottom line.
www.evomarkets.com /weather   (183 words)

 The Need to Manage Weather Derivative Portfolios on a Global Basis by Gautam Jain
The first weather derivative deal was struck in the US almost three years ago and traded volumes since then have grown exponentially.
Weather is a global phenomenon and the degree to which indices measured at weather stations in geographically distinct locations are correlated is often significant.
For example, where players are looking to securitise a globally diversified weather derivatives portfolio, which is likely to exhibit lower volatility than a portfolio based on deals struck in one market only, the cost of bond issuance may be reduced.
www.fenews.com /fen18/weatherderivative.html   (1592 words)

 GuaranteedWeather -- A New Direction In Weather Risk Management   (Site not responding. Last check: 2007-11-02)
Weather market makers are looking for new end users to join the dominant energy generation industry.
The October 10, 2001 issue of Weather Derivatives, reports details of the Aon Re Canada deal in brokering what it refers to has 'the first index-linked precipitation floor in the crop sector'.
Weather markets could also play a significant role in new products that may help U.S. agriculture meet the challenges from society to reduce pollution and improve resource use, in particular for water.
www.guaranteedweather.com /page.php?content_id=28   (3019 words)

 The Cover Pages: Weather derivatives community to develop WeatherML
Weather Risk Advisory, an independent software and consulting company specializing in weather derivatives, is leading an initiative to develop WeatherML, an XML-based data protocol for electronic processing of weather derivatives.
Weather Risk Advisory has been working on the WeatherML concept for the last six months, and Version 1.0 will be completed in the second quarter of 2001, from which time new interim releases will be issued approximately quarterly.
The weather derivatives market is still in its early stages, allowing the industry to reduce the costs of the inevitable standardization by developing and adopting WeatherML while the market itself is developing, and there are still a limited number of players.
xml.coverpages.org /weatherML-Ann.html   (732 words)

 Weather Risk - Derivatives market
She explains that weather derivatives are hedges against low or high energy demand - a volume rather than a price hedge - and so would not have been suitable in this case.
A weather derivative is not based on underlying physical prices, but on physical data - usually temperature levels - that affect the volume of energy consumed.
Derivative providers say the increased liquidity of weather instruments - a result of the development of new regional benchmark contracts - may draw more participants into the market to hedge against similar price spikes in the future.
www.financewise.com /public/edit/energy/weatherrisk/wthr-derivatives.htm   (1647 words)

 Bloomberg.com: News & Commentary
Derivatives are financial obligations whose value is typically derived from debt or equity securities, commodities, currencies or other assets.
Weather derivatives are often tied to an index measuring an aspect of the climate, such as temperature or precipitation, and buyers typically pay an annual premium of 5 percent to 20 percent of the amount insured.
One area of the European weather risk market that's expected to boom in coming years is wind derivatives, says Steve Jewson, head of weather derivatives at London-based Risk Management Solutions Inc., which provides the wind measurements used to calculate the payouts on the Electricite de France bonds.
quote.bloomberg.com /apps/news?pid=nifea&&sid=a.j4Rp0RIa6M   (1876 words)

 Introduction to Weather Derivatives (WD)
Weather is the single most important factor in influencing price volatility, volume fluctuations and revenues in the energy industry, as well as other industries globally.
Weather risk management is now expected by investors and industry professionals to manage potential exposure to price and volume fluctuations.
After completing this course delegates will be able to qualify and quantify weather risk in their businesses and determine the specific weather derivative tools necessary to protect revenues from Mother Nature.
www.oxfordprinceton.com /silver/w_wxder.asp   (284 words)

 Weather Risk - Weather derivatives
Insurers and reinsurers are now applying their knowledge of hazard risk analysis to structure derivative products to protect against weather risk in flexible, innovative and appropriately-priced ways.
These include trends in the location’s data, movement of the measurement station, seasonal climatic events (for example, the weather systems El Niño and La Niña, and the North American cold front called the Clipper Effect), the period to be covered (that is, the number of months per year, single or multi-year contract) and available forecasts.
Weather risks cannot be eliminated, but there is recourse to protect against their adverse financial impact.
www.financewise.com /public/edit/riskm/weather99/wthr99-weather.htm   (1724 words)

 The Weather Notebook | Betting on the Weather
Weather derivatives have been sold for six years now in markets such as the Chicago Mercantile Exchange.
The derivatives were popularized by Enron Corporation, and energy and power companies still buy the bulk of them.
Some financial analysts predict that in a few years no company will be able to use the weather as an excuse for why their profits are down -- as long as there's plenty of beer.
www.weathernotebook.org /transcripts/2004/01/05.php   (231 words)

The derivative itself is merely a contract between two or more parties.
There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Derivatives are generally used to hedge risk, but can also be used for speculative purposes.
www.investopedia.com /terms/d/derivative.asp   (399 words)

 Introduction To Weather Derivatives
In 1997 the first over-the-counter (OTC) weather derivative trade took place, and the field of weather risk management was born.
For example, a company might use a weather derivative to hedge against a winter that forecasters think will be 5° F warmer than the historical average (a low-risk, high-probability event).
Weather contracts on U.S. cities for the winter months are tied to an index of heating degree day (HDD) values.
www.investopedia.com /articles/optioninvestor/05/052505.asp   (1489 words)

 Weather risk securitization
Weather risk securitization is essentially a risk securitization device, similar to cat bonds methodology but the inherent risk being transferred is not insurance risk but risk of weather fluctuations.
Weather may be a source of risk for several industries.
Weather derivatives provide such companies an option to hedge against risk of weather fluctuations.
www.vinodkothari.com /weather.htm   (588 words)

 Risk magazine - Weather derivatives soar...
The number of over-the-counter and exchange-traded contracts traded in the weather derivatives market grew by 43% between April 2001 and April 2002, and total notional values grew by 72% to $4.3 billion, according to a survey released last month by the Weather Risk Management Association (WRMA) and PricewaterhouseCoopers.
There were 765 weather contracts traded in Europe during the survey period, up 345% over the year-earlier period, with total notional values hitting $601 million, compared with $49 million the previous year.
Winter is typically the busiest season in the weather market since many heating fuel providers try to offset potential sales losses in the event that their peak demand period is mild.
www.risk.net /public/showPage.html?page=5365   (546 words)

 Cover Pages: Weather Markup Language (WeatherML)
The Weather Risk Advisory, a software and consulting company focusing on weather derivatives, is leading an initiative to develop WeatherML, an XML-based data protocol that looks to be a standard for the electronic processing of weather derivatives.
He adds that WeatherML would be useful in areas such as streamlining the electronic confirmation of trades and furthering the growth of the weather derivatives market as a whole with the spread of software development for the industry...
The steering committee is seeking advice and suggestions by interested weather derivatives industry parties before the initial version is released.
xml.coverpages.org /weatherML.html   (863 words)

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