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Betting on the Weather
Mon Jan 05, 2004
Listen in RealAudio 
A warm winter can spell financial disaster for a ski resort, and until recently, all they
could do is pray for colder temperatures. But today a shrewd resort can recoup their losses by
making bets on the weather.
Hi, I'm Bryan Yeaton, and this is The Weather Notebook.
Companies whose business is affected by the weather have a new tool for protection against
weather extremes, a financial instrument called a "weather derivative." The basic idea is that
the seller of the derivative agrees to pay the buyer of the derivative a set amount of money
based on some weather condition -- a certain amount of rainy days in some period of time, or a
certain number of days below freezing.
European breweries make more money when their customers can sit outside in the sunshine and
leisurely drink a few pints, and by buying a weather derivative, they can now hedge their
losses against inclement weather. Last year, the two-week Munich Oktoberfest was hedged
against rain.
Weather derivatives have been sold for six years now in markets such as the Chicago Mercantile
Exchange. The number of derivatives sold has tripled in the last year, to about 12,000, worth
over four billion dollars.
The derivatives were popularized by Enron Corporation, and energy and power companies still
buy the bulk of them. But everyone from icecream-makers to construction companies are catching
on. Some financial analysts predict that in a few years no company will be able to use the
weather as an excuse for why their profits are down -- as long as there's plenty of beer.
See if The Weather Notebook Tour is coming to a town near you on our website:
www.weathernotebook.org.
Today's Links
Speedwell Weather Derivatives:
http://www.weatherderivs.com/
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