A weather derivative that is principally used to transfer risk associated with adverse weather events. It is an index-based futures contract in which one counterparty receives payment if the degree days over a specified period are higher than the strike level, while the other counterparty gets paid if the degree days over that period are less than the strike. A business with weather exposure may choose to buy or sell a weather futures in order to hedge against climate changes that inversely affect its operations.
February 20, 2023