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WEATHER DERIVATIVES AS TOOLS FOR FINANCIAL MANAGEMENT OF NATURAL DISASTER RISK

Пламена Златева

Abstract

The purpose of the paper is to analyze the essence, characteristics and capabilities of weather derivatives as successful tools for financial management of natural disaster risk. In particular, it is considered the risk from natural disasters due to climate-related events (weather-related hazards), such as extreme precipitations and temperatures, storms, heatwaves, snowfalls, floods and droughts. The paper importance is based on the reasoned expectations that climate change will increase the frequency and intensity of weather-related hazards, which in turn will adverse impact on the economic and sustainable development of the companies. It is stated that the weather derivative is a financial contract whose payoff depends upon weather variables (underlying asset) such as temperature, precipitation or wind, observed at a fixed location during a specified interval of time. ?hese derivatives are very suitable for industries whose profitability is largely determined by the weather-related hazards. It is demonstrated that an industrial farmer loses whenever there is too much rain (flooded lands) or not enough rain (droughts). It has also been shown, that usually, energy producers and energy consumers enter into the weather derivative contracts. Most used weather indexes in the weather derivatives are described: Degree day (DD); Cooling degree days (CDD); Heating degree days (HDD); Energy degree days (EDD); Cumulative Amount of Temperature (CAT); Growing degree days (GDD).

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DOI resolver: doi.org/10.5593/sgem2019/5.3/s21.119

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