Weather derivatives: Business hedge instrument from weather risks

Abstract

In the late 1990s, a new financial market was developed - a market for weather derivatives, so that the risk managers could hedge their exposure to weather risk. After a rather slow start, the weather derivatives market had started to grow rapidly. Risk managers could no longer blame poor financial results on the weather. Weather risk could now be removed by hedging procedure. This paper will explain briefly what the weather derivatives are and will point out at some of the motives for use of derivatives. Thereafter we will look at the history of the weather risk market, how the weather derivatives market has developed in recent years and also who are the current and potential players in the weather derivatives market.

Keywords

• weather derivatives
• weather risk
• risk management
• weather indices
• futures
• options
• hedging