Business and Personal Finance Dictionary

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• WEATHER DERIVATIVES
  
  Definition: Derivative products whose values depend on risky weather variables, such as temperature, precipitation, or dollar damage from extreme weather. Example: Options on heating or cooling degree days, hurricane-based catastrophe bonds. Application: An insurer or reinsurer who wanted to lay of f some risk in the capital markets might issue a bond that repaid principal as a function of the loss rate for Florida East Gulf Coast property casualty rates. Pricing: The pricing models are sensitive to assumptions, as usual. Historical results depend on the historical period. With global warming and El Nino, pricing isn't simple. Risk Management: Catastrophe contracts are simple ways of laying off weather risk.
  
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