Weather Derivatives and Their Implications for Power Markets
Abstract
Major segments of the U.S. economy are affected by weather. With the emergence of weather derivatives, exposure to weather‐related risk has evolved from being merely accepted. As a result, weather risk management strategies are increasingly being adopted in strategic decision‐making by senior management. Weather derivatives enable managers to focus on core operating risks by trading away those business exposures related to temperature, precipitation, snow level, etc. These contracts offer a unique opportunity to discretely trade a new category of risk, which was previously considered to be an inevitable cost of doing business. This article describes the weather derivatives market and its contracts and outlines the principles of pricing and risk analysis in weather markets. In closing, the article discusses the application of these products for portfolio and business risk management using illustrative examples from the energy markets.
Citation
Ellithorpe, D. and Putnam, S. (2000), "Weather Derivatives and Their Implications for Power Markets", Journal of Risk Finance, Vol. 1 No. 2, pp. 19-28. https://doi.org/10.1108/eb043442
Publisher
:MCB UP Ltd
Copyright © 2000, MCB UP Limited