Academic journal article Journal of Risk and Insurance

Climate Risk and the Weather Market: Financial Risk Management with Weather Hedges

Academic journal article Journal of Risk and Insurance

Climate Risk and the Weather Market: Financial Risk Management with Weather Hedges

Article excerpt

Climate Risk and the Weather Market: Financial Risk Management With Weather Hedges, by Robert S. Dischel, 2002, London: Risk Books

At the time of writing this review, a sampling of recent financial risk management news includes the following items: Japan's first weather derivative involving high wave levels recently went on sale; a development bank is readying what would be only the second weather-related bond offering for placement in the capital markets; and there are new efforts in the areas of providing real-time weather information and of weather derivative portfolio management software. It seems as if the relatively new weather derivatives market is not going away anytime soon-certainly the risks to organizations, countries, and economies associated with weather volatility will not be going away. And anyone with an exposure to or interest in this field will find the subject comprehensively addressed in a very fine book, Climate Risk and the Weather Market: Financial Risk Management with Weather Hedges, edited by Robert Dischel.

A total of 28 authors wrote or coauthored the 17 chapters of this volume, and offering from Risk Books. The contributors are a mixture of academics and practitioners, as well as a blend of experts in the fields of meteorology, economics, financial risk management, and modeling. The book's chapters are grouped into four sections:

1. Elements of the weather risk market. This section includes five chapters devoted to an overview of the weather market, a description of the basic format and operation of financial weather contracts, and a discussion of weather measurement and data issues. This section serves as an excellent introduction for someone unfamiliar with the weather market and the hedging possibilities associated with weather risk.

2. Climate forecasts, managing variations, and derivative prices. The six chapters in this section, together with the chapters in the first section, virtually provide an advanced course in meteorology. Chapters deal specifically with meteorological patterns and events, the sources of uncertainty in climate and weather, approaches to measuring that uncertainty, and the methods and accuracy of weather forecasting. There are also chapters dealing with statistical and pricing issues related to weather derivatives. Chapter 8, titled "Weather Derivative Modeling and Valuation: A Statistical Perspective," is the most mathematically involved chapter in the book, but should be of significant interest to those with a quantitative bent.

3. Investor issues. The three chapters in this section deal with the evolution of weather-related instruments within the broader alternative risk transfer market, weather note securitization, and the management of a portfolio of weather derivatives. …

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