Today weather is not just an environmental issue – it is a major economic factor, more so if the economy is agriculture driven as is the case with India. It has an impact on corporate revenues and earnings of virtually every industry, including agriculture, energy, entertainment, construction, travel and many others. Until recently, there were very few financial instruments which could help companies in hedging against weather risks. However, since the inception of the weather derivative, things have changed.
In contrast to insurance, weather derivatives cover low risks and high probability events as per certain customised policies. Currently, energy companies and energy-related businesses use Weather Futures. However, there have been growing concerns and signs of potential growth in weather futures trading among agricultural firms and companies involved in tourism and travel as well. As such, India also has witnessed a welcome response to weather derivatives owing to the fluctuations in weather conditions. In India, Rainfall insurance has wide spread implications because despite the technological advancements, India has to depend on monsoon rains, with lack of irrigation. Still, it has been most often used in the U.S. and the U.K.
No doubt, this form of derivative trading is highly applicable in context with the present scenario but this carries along with it certain disadvantages as well for the daily models on the flip side of the coin. It may be as follows:
• Complexity of the model
• Risk of model error due to more complexity in the structure.
• Modelling daily temperature which is no less than a herculean task
Thus, in spite of the above mentioned flaws in the system, chances are high that weather derivatives shall help countries redeem themselves from the clutches of the mercurial rains and work towards strengthening of the economies, thereby, giving a fillip to droughts and floods.
Submitted By:
Ritika Yadav
In contrast to insurance, weather derivatives cover low risks and high probability events as per certain customised policies. Currently, energy companies and energy-related businesses use Weather Futures. However, there have been growing concerns and signs of potential growth in weather futures trading among agricultural firms and companies involved in tourism and travel as well. As such, India also has witnessed a welcome response to weather derivatives owing to the fluctuations in weather conditions. In India, Rainfall insurance has wide spread implications because despite the technological advancements, India has to depend on monsoon rains, with lack of irrigation. Still, it has been most often used in the U.S. and the U.K.
No doubt, this form of derivative trading is highly applicable in context with the present scenario but this carries along with it certain disadvantages as well for the daily models on the flip side of the coin. It may be as follows:
• Complexity of the model
• Risk of model error due to more complexity in the structure.
• Modelling daily temperature which is no less than a herculean task
Thus, in spite of the above mentioned flaws in the system, chances are high that weather derivatives shall help countries redeem themselves from the clutches of the mercurial rains and work towards strengthening of the economies, thereby, giving a fillip to droughts and floods.
Submitted By:
Ritika Yadav
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