Saturday, January 17, 2009
Weather Derivatives
It doesn't look like there is a lot of this existing, but it seems like there would be a big market for weather derivatives and futures. There are a lot of people whose profits is a function of the weather, where weather volatility can be a big problem. Being able to hedge that risk away makes a lot of sense, even if the underlying asset doesn't really have a value. Utility and heating companies would be natural customers, but really anyone with a weather-varying profit component can lower volatility. Plus you can hedge for the psychic bads of really cold weather.
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These do exist, I know that many small farms sell their risk involving rain/weather so that their annual income is more predictable (though lower). Makes sense, especially if buyers can buy farm risk shares from all across the country...
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