Weather Derivatives

Abstract

This article demonstrates that companies from a wide range of industries are able to hedge against the volatility of their revenues more efficiently by resorting to non-standardized weather derivative contracts. In addition, including weather derivatives contracts as an additional asset class produces significant diversification benefits for conventional portfolios. This study proposes that institutional investors write non-standardized contracts for their corporate clients, repackage them, and offer them as an additional asset class. This strategy would help to mitigate the lack of liquidity inherent in non-standardized contracts and, simultaneously, provide significant diversification benefits for the conventional portfolio.