Weather Trading
Weather derivatives are the first financial tool available to risk managers to stabilise earnings volatility caused by the unpredictability of the weather. The market started during the summer of 1997 when two US power companies, realising that they had opposite weather exposure, entered into the first weather derivative swap contract for the upcoming winter season. Since then, the market in the US has grown rapidly to an estimated 2,500 deals with a value at risk (VaR) of around $5 billion.

They are increasingly becoming standard fare in the portfolios of utility companies with non-US based deals set to be of increasing importance over the coming year. Markets are also developing in Europe, East Asia, Australia and South America with predictions of the European market being worth $8 billion within the next two years.

For more information, Please contact Mr. Anuj Kumbhat: 91-9987-020616, Mr. Pardeep Singh: 91-9992-422669

High Temperature Coverage

Under this, loss in crop yield due to high temperature is covered. Crops like wheat and mustard are too prone to losses due to heat stress in the month of February and March.

Example

A commodity trader Guddu Bhai who wants to hedge yield risk due to high temperature in the month of March buys a HDD (High degree days) contract in which he receives a payment if temperature in March is higher than thresholds.

Term sheet of product will be as following
  • Cover Period: 1st March to 31st March
  • Maximum temperature Threshold: 34 degree
  • Index (HDD): Sum of daily value of Maximum temperature over threshold ∑ Max (Tmax – Threshold, 0)
  • Strike: 30
  • Notional: Rs. 50 /degree
  • Sum Insured: Rs. 5,000
  • Premium: Rs. 500
Unseasonal Rainfall Cover

Coverage of loss in crop yield due to unseasonal rainfall. Crops like wheat and mustard are too prone to losses due to unseasonal rainfall during harvesting period

Example 1

A commodity trader Mr. Parikh who wants to hedge yield risk due to unseasonal rainfall in the month of April buys an ERI (Excess Rainfall Index) contract in which he receives a payment if total rainfall in April is higher than threshold.

Term sheet of product will be as following
  • Cover Period: 1st April to 30th April
  • Index (ERI): Sum of rainfall over cover period
  • Strike: 150mm
  • Notional: Rs. 20 /mm
  • Sum Insured: Rs. 5,000
  • Premium: Rs. 500

Example 2

A commodity trader Mr. Reddy who wants to hedge yield risk due to unseasonal rainfall in the month of April buys an ERI (Excess Rainfall Index) contract in which he receives a payment if sum of 2 day rainfall in April is higher than threshold

Term sheet of product will be as following
  • Cover Period: 1st April to 30th April
  • 2 Day rainfall Threshold: 40 mm
  • Index (ERI): Sum of 2 day rainfall value above threshold ∑ Max (2 day rainfall – Threshold, 0)
  • Notional: Rs. 20 /mm
  • Sum Insured: Rs. 5,000
  • Premium: Rs. 500

Each financial product sold by Weather Risk Ltd. is described by a set of definitions that detail how the product works in terms of payout characteristics
  • Location: To which city or cities will the weather be indexed? These locations are usually Indian meteorological department & state govt. managed weather stations.
  • Index: What is the actual index at which the product will settle? This usually involves counting up daily measurements of a weather variable(s) over a period of time and organizing them in such a way which represents the cash flows of the client.
  • Period: What is the calculation period for the index? The majority of weather derivatives are monthly or seasonal in nature but can also be designed for shorter or longer period.
  • Notional: What is the payout rate per index unit beyond the strike? This amount is highly flexible and is usually linked to the underlying weather exposure being hedged.
  • Sum Insured: What is the maximum amount that can be paid out under the contract?