Weather derivatives

Research Paper (undergraduate) from the year 2006 in the subject Business economics - Investment and Finance grade: 17 University of Applied Sciences Essen course: Case study in the core subject International Management - Risk Management language: English abstract: The ability to hedge price risks of industrial and consumer goods is well-developedan widely used but for many customers and companies a variance in the unit volume being caused by a unexpected weather situation can be as detrimental to thebottom line as unit price variation. In the past market participants were exposed defencelessly to this risk because weather has been anything but predictable...There was bundle of incidents in the late 90's which lead to the development ofweather derivatives as a new flexible instrument to mitigate risk resulting fromweather: First the changing world climate causes more often extreme weather situations such as El Nino. Weather catastrophes like the hurricanes Katrina and Rita in the USA summer flood of 2002 and the desert summer of 2003 in Germany have been increasing the awareness of weather risks among the population and in the management of the companies. Unforeseen weather conditions may cause a decline in companies' earnings. It is likely to imagine that for example a cold and rainy summer will lead to a plummeting consumption of ice cream. In times of an upward tending importance of the shareholder value approach a professional and effective risk management is inalienable. Insurance policies can cover catastrophic damages but derivatives are an efficient tool to face financial risks resulting from the weather and to stabilize earnings. Secondly the worldwide markets are changing. Formerly strictly regulated markets show an ongoing trend of deregulation and therefore a development from monopolies to wholesale markets. Facing a new competitive situation companies have to realize that it does not last to hedge the unit price of their go