Academic journal article Journal of Risk and Insurance

Managing Weather Risks: The Case of J. League Soccer Teams in Japan

Academic journal article Journal of Risk and Insurance

Managing Weather Risks: The Case of J. League Soccer Teams in Japan

Article excerpt

INTRODUCTION

Weather-related risk exposures, such as varying temperature and precipitation, are important concerns for companies worldwide. According to the Chicago Mercantile Exchange (CME) Group, (1) one-third of businesses around the world are affected by adverse weather conditions. In particular, 80 percent of U.S. firms and 75 percent of Japanese firms have been exposed to weather-related risks to different extents (Myers, 2008; Yokoyama, 2014). Weather risks are of particular interest to the leisure and entertainment industries, such as ski resorts with snow risks (Brockett, Wang, and Yang, 2005), golf courses and beaches with precipitation risks (Smith, 1993; Leggio, 2007), and as we will focus on in our study, the sports industry with an assortment of different weather risks. Some initial evidence has been provided in the literature on varying effects of adverse weather for sports teams in different types of sports and geographic areas (e.g., Bird, 1982; Bruggink and Eaton, 1996; DeSchriver, 2007).

In most regions of the world, weather risks have been managed more or less by specialized insurance policies or other government-sponsored financial mechanisms (IPCC, 2012). In the United States, these risks are now primarily managed using weather derivative products since they became available on the CME in 1997. The trading volume on CME was $9.4 billion from April 2010 to March 2011 with a large number of trades (466,000 in total) (Weather Risk Management Association [WRMA], Annual Industry Survey, 2011). Although there has been a drop from the high of over $40 billion from April 2005 to March 2006, it is still of paramount significance. Temperature contracts account for the great majority of CME contracts and less than 5 percent are precipitation contracts. Temperature-based weather derivatives are primarily based on indices of heating degree days (HDD) and cooling degrees days (CDD) and are traded for 24 U.S. cities, 6 Canadian cities, 11 European cities, 3 Australian cities, and 3 Japanese cities. Precipitation-based contracts are available for March to October in the form of monthly contracts or seasonal contracts (2 to 8 consecutive months in length). Both futures and options contracts are available and they are based on a precipitation index reflecting the cumulative precipitation amount (measured in inches) for the desired time period. Futures contracts pay $500 times the respective index value, with a tick size of 0.1 inch. Option contracts have exercise prices ranging from 0 to 20 inches for monthly contracts and 0 to 60 inch. for seasonal contracts. The indices are currently available only for 10 U.S. cities and are not available for other countries. In fact, most of the CME contracts are used for weather events in different regions within North America and less than 5 percent are used for regions outside of North America and Europe.

According to WRMA annual industry surveys since 2001, the growing over-thecounter (OTC) market plays an active role in complementing the CME market. Of the 14 surveyed companies (WRMA members in various industries such as banking, insurance, and energy), a total of 998 OTC contracts were written from April 2010 to March 2011, a 160 percent increase from the previous year. These contracts are large with over $2 million notional value on average and in total, represent a volume of $2.5 billion in 2010/2011. This represents the highest total notional value since 2004/2005. Note that the percentage of OTC contracts with counterparties that do not participate in the survey has been consistently high over time (79 percent in the 2011 survey). In contrast to the CME market, precipitation contracts account for at least 20 percent of the OTC contracts and regions outside Europe and North America have a much better representation (over 10 percent in 2011 and over 20 percent in 2010).

Despite the increasing trend of contracts covering precipitation events and Asian markets in the recent years, the weather derivatives market is still greatly dominated by temperature contracts covering North American events. …

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