Weather Derivatives
Weather affects every aspect of the economy. It is estimated that weather and climate sensitive industries in the United States directly impacted by weather (such as agriculture, construction, energy distribution, and outdoor recreation) account for nearly 10 percent of GDP. To reduce risk associated with adverse weather and climate conditions, many companies are increasingly using weather derivatives as part of their risk management strategy. The most common types of weather derivatives are heating degree day (HDD), cooling degree day (CDD) and cumulative average temperature (CAT).
Weather derivatives forecasts provided here are based on our seasonal forecast maps for North America and Europe. Anomalies of the weather derivative forecast values are generally proportional to the CF values on those maps. However, for some cities adjustments are made to take into account the difference between the station temperature data and NCEP/NCAR Reanalysis data (see an example of such differences for Toronto, Canada, in our post-mortem analysis for summer 2008).
Our forecasts can help energy and other weather- and climate-sensitive companies to improve their risk management strategies associated with climate fluctuations. They can also help professional traders to increase their profit from trading weather derivatives (see examples of how beneficial the climate forecast information can be).
Additional reading
- Wikipedia articles on weather derivatives and heating degree day
- Introduction to Weather Derivatives
- The Weather Profits
- Making Climate Forecasts Matter (online book)
- Business Aspects of Seasonal Climate Forecasting
- Weather, Finance and Meteorology: Forecasting and Derivatives by Samuel Randalls
- CME Historical Weather Data
- An Introduction to CME Weather Products
- Weather Risk Management by Bob Dischel
- Vinod Kothari's securitization website contains a comprehensive list of weather derivatives-related links
- Protecting Winter Profits