weather derivatives

[Ian Murray <seamus2001@xxxxxxxxx>]

Global weather derivatives market grows threefold
Reuters, 06.05.03, 10:01 AM ET

FRANKFURT, June 5 (Reuters) - Global trading of weather derivatives has
trebled in the year to April 2003 partly due to a rising number of
European firms aiming to hedge against changes in temperatures and
rainfall, a report said on Thursday.

At least 11,756 contracts worth $4.2 billion were signed worldwide between
April 1 2002 and March 31 this year, a joint survey by the U.S.-based
Weather Risk Management Association (WRMA) and consultancy
PriceWaterHouseCoopers showed.

"The study reveals increasing interest in the market, particularly in
Europe where a number of new players have moved in," said Hans Esser, head
of FinanzTrainer.com, the first German consultancy to specialise in
weather derivatives deals.

The number of contracts signed in Europe surged by 90 percent to 1,480
year-on-year, the data showed.

More active trading at the U.S.-based Chicago Mercantile Exchange also
boosted overall volumes, but the vast majority of deals were still
arranged in the over-the-counter (OTC) market, said Esser, whose firm is
one of four German WRMA members.

Others include the world's fifth largest reinsurer, Germany's Hannover Re.

"All in all there has been hedging against weather risk of a total value
of almost $16 billion worldwide in less than six years," Esser told
Reuters.

Weather derivatives allow companies ranging from regional utilities to
air-conditioned airports and icecream makers to hedge against risky
changes in temperature, rainfall, snow and wind that could hit their
profits.

"Initially, risk management with weather derivatives was mainly for gas
suppliers, whose sales significantly depend on winter temperatures," Esser
said.

"If the actual temperature fell short or was above the average temperature
by one degree this generally meant a five-percent rise or fall in sales
for gas suppliers," he said.

A lion's share of the contracts signed in the survey-period still were
temperature-related, but hedging against rainfall, snow and wind was
seeing more demand, said the consultant.

"Some 85 percent was temperature-related...but almost 500 of all contracts
signed hedged against rainfall," said Esser.

In 2003, he expects the market to show slow, but steady growth, partly
depending on the pace of the European energy market liberalisation, which
generated risk management know-how.