Weather derivatives: Weather risk, managing exposures and hedging tools

Weather conditions affect all sorts of things, including the business. Weather conditions have an impact on oil and gas consumption and electricity supply and demand. Hence, the financial performance of energy companies is weather-dependent. In the agro business, precipitation or drought, temperature and sun intensity can influence the quality of crops and the harvest quantities. Furthermore, floodings may limit mining for metals. Altogether, roughly a third of the global economy is exposed to weather risk. This risk can be managed by insurance, but weather derivatives provide an alternative. These instruments, traded in the weather markets, are characterised by specific conditions. In order to price the tools, weather data have to be collected, processed and analysed.