weather derivatives

Les Schaffer schaffer at
Sat Aug 16 07:10:59 MDT 2003

Letting Nature Run Its Course, and Making Money From It

LONDON, Aug. 14 -- Brutal heat in Europe has caused power prices to
soar and has robbed the profits of bakeries and chocolate
makers. Meanwhile, rain in the northeastern United States has left
amusement parks and beach resorts empty.

Where most people see bigger bills, heat exhaustion or ruined
vacations, investment banks and traders are finding a way to make
money. The fledgling market for weather derivatives is expanding
rapidly, they say, and the nasty weather is only going to help.

Weather derivatives allow companies whose earnings are affected by
nature's variables -- temperature, precipitation, frost and others --
to hedge against that risk. A construction company that cannot pour
concrete when the weather is too cold, for example, can buy a
derivative that will pay out if there are more than the average number
of freezing days in a winter. Soon, say some proponents, there will be
no excuse for letting nature run its course.

"Within five years' time, companies won't be able to say, `Our profits
are down because of the weather,' " said Duncan Wilson, a consultant
to WeatherXchange, a venture between the Met Office, a British
forecaster, and the Chicago Mercantile Exchange.

Weather derivatives were introduced six years ago and popularized in
the energy industry by Enron. But the collapse of Enron and the
shrinking of other energy companies has left a vacuum that is quickly
being filled by investment banks and insurers eager to sell the

full at:

les schaffer

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