Weather Derivatives

Long Range Weather Forecast subscription access

Economists believe that 70% of the U.S. economy is vulnerable to abnormal weather patterns. Up until very recently, businesses that were particularly sensitive to weather uncertainties had very few options to choose from with regards to hedging weather risk. This situation has begun to change though due to the development of weather derivatives.

Weather derivatives allow businesses sensitive to the vagaries of weather to protect themselves against changes in costs and sales linked to variations in climate. These financial instruments gained in popularity during the winter of 1998/99 due to long-range forecasts calling for warmer than normal weather during that period (due to the onset of El Nino).

Weather derivatives can theoretically be designed for almost any weather variable (rain, snow, wind, etc.), though most of the activity so far has centered around long-range (seasonal) temperature forecasts. Forecasts provided in Trade Winds newsletter are of great interest to those companies involved in weather derivatives transactions.

Below is an example of weather information that is used in weather derivatives transactions. Such information can be designed for most any area of the United States. Please contact Harvey Freese for more information on weather data that we can provide and the cost structure for subscriptions.

1. Based on CAT simulation model interpretaion of NOAA 30 and 90 day Probability forecasts

Heating dd
	Feb	Mar	Total/Net
Temp/Precip Forecast	+7% /CL	+3% /-3%
Estimated DD	458	251	709
Standard Deviation	145	118	177
90% CL -Lower	145	118	177
90% CL -Upper	620	457	926

Prob of exceeding:
700	725	750	775	800	825	850	875	900	925dd
51	46	41	36	29	26	21	14	14	11

2. Based on the regression model Interpertation of Freese Notis Temperture forecasts

Heating dd
	Feb	Mar	Total/Net
Temp/Precip Forecast	+3F	+1F
Estimated DD	414	246	660
Standard Deviation (sub)	120	75	186
90% CL -Lower	194	109	320
90% CL -Upper	634	383	1000

Prob of exceeding:
700	725	750	775	800	825	850	875	900	925dd
42	36	32	27	23	22	15	12	10	8%

3. Based on NOAA/NCDC 30-year normals (1961-90)

	Feb	Mar	Total/Net
Estimated HDD	484	286	770
Standard Deviation	117	95	174
90% CL-Lower	291	129	484
90% CL-Upper	677	433	1056

Prob of exceeding:
700	725	750	775	800	825	850	875	900	925dd
66	60	54	49	43	38	32	27	23	19%

4.Based in the past 10 years (1988-97)

	Feb	Mar	Total/Net
Estimated HDD	414	263	677
Standard Deviation	104	61	140
90% CL-Lower	233	152	420
90% CL-Upper	604	373	933

Prob of exceeding:
700	725	750	775	800	825	850	875	900	925dd
44	37	30	24	19	15	11	8	6	4%

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