Magazine article Risk Management

Hedging Profits.Weather or Not

Magazine article Risk Management

Hedging Profits.Weather or Not

Article excerpt

Mark Twain once said that nobody does anything about the weather. That's not altogether true anymore. A new "weather hedge" has been announced that will protect companies with financial interests that can be affected by adverse conditions. The hedge, offered by the newly formed Worldwide Weather Trading, will minimize the financial risk of a specific condition occurring (within a designated time at a specified location) and will be backed by insurers and reinsurers that will "warehouse" the risk.

The hedges will be offered in two categories:

* The weather option is a trade in which a payment is made at a predetermined time depending on the occurrence or nonoccurrence of a weather condition.

* The weather swap is an exchange of dollar value for every point above or below a set threshold, e.g., number of inches of snow or degrees of temperature.

Here's an example of how a trade might work: If a natural gas producer in Chicago is concerned about the possibility of a warm winter, they can hedge the risk of a reduction in their revenue from gas sales. …

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