suppose there is a weather derivative that is like a “swap”, in the sense that depending on the movement of the underlying variable, one party will have to pay the other. is there a premium paid to enter into such a contract? i know that to buy a weather derivative off the cme one has to pay- but what if this one was “specially structured” for two parties? please help, all you wise people out there!
There are plenty of futures on CME that require no upfront payment to enter (except margin deposit). A futures is sorta like a swap (I pay you at the expiry if the spot is less than the current futures price o/w you pay me).
hoo boy things must be really bad to start prowling the weather derivatives aisle
Bloody gamblers, go to Vegas instead.
It’s only for a project at school! And Joey- thanks a lot!
I have never heard of these product before, but growing up in a agricultural community I can see how these products could be used to hedge yield production and thus smooth annual revenue. Also it would be great for utility companies for the same reason warmer during winter, lower consumption of energy and reduction in revenue. This opens some interesting strategies in my eyes.
That’s good and I encourage that, but the market isn’t very deep. At the end of the day, you can’t hedge them, you can’t rationally price them, and there is only one side of the trade that has an obvious risk being hedged.
and later people will manipulate the weather the same way they manipulate the market
I’ve already got an aerosol bottle, I’m joining Professor Chaos at 10.
The product has existed for several years, actually. http://en.wikipedia.org/wiki/Weather_derivatives
JoeyDVivre Wrote: ------------------------------------------------------- > That’s good and I encourage that, but the market > isn’t very deep. At the end of the day, you can’t > hedge them, you can’t rationally price them, and > there is only one side of the trade that has an > obvious risk being hedged. In the US, there are insurance policies that farmers can take out to cover drought, hail etc. So someone has figured out how to price them.
Great book for weather derivatives: http://www.amazon.com/Weather-Derivative-Valuation-Meteorological-Mathematical/dp/0521843715
JoeyDVivre Wrote: ------------------------------------------------------- > That’s good and I encourage that, but the market > isn’t very deep. At the end of the day, you can’t > hedge them, you can’t rationally price them, and > there is only one side of the trade that has an > obvious risk being hedged. Joey, have a look at this paper is about how to hedge weather derivatives, very interesting http://papers.ssrn.com/sol3/papers.cfm?abstract_id=486302
OK - that paper discusses essentially static hedges using weather swaps for hedging other weather derivatives. I meant something more like being able to dynamically hedge in the underlier.