Weather Derivatives: The Convergence of Insurance, Capital Market and Weather Services, an Overview

Gad Levy*

University of Phoenix and NorthWest Research Associates

30 November 2006, 4:00 P.M., Mary Gates Hall 238

The impact of weather on business activities is enormous and varies geographically and seasonally. Abnormal weather conditions can cause significant disruption to business operation and planning, and cause revenues and earnings to fluctuate widely for corporations in a wide variety of industries. To address these challenges, a relatively new financial instrument, namely weather derivatives, emerged the mid-1990's. They were initially designed to manage and mitigate these abnormal weather impacts. This seminar introduces both the business and scientific aspects of weather derivatives. The first part of the talk reviews the history and trends and speculates the future of the weather derivative market. Its "business mechanics" is also discussed. In the second part, methods for analyzing and pricing weather derivatives are introduced. Major challenges facing the weather derivative market are also presented.



*Gad Levy is a faculty member at the University of Phoenix's Graduate School of Business and a Senior Research Scientist at NorthWest Research Associates, Inc. He is also an Affiliate Associate Professor at the College of Oceanic and Atmospheric Sciences of Oregon State University. Previously he held positions with the applied statistics group at the Boeing Company, the University of Washington, and Oregon State University. His research interests are in weather and climate impact and risk management, natural resource management, data analysis and assimilation, hybrid statistical-physical modeling methods, and Bayesian approaches to forecasting.

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