Weather Derivative

AAA

DEFINITION of 'Weather Derivative'

An instrument used by companies to hedge against the risk of weather-related losses. The investor who sells a weather derivative agrees to bear this risk for a premium. If nothing happens, the investor makes a profit. However, if the weather turns bad, then the company who buys the derivative claims the agreed amount.

INVESTOPEDIA EXPLAINS 'Weather Derivative'

This is not the same as insurance, which is for low-probability events like hurricanes and tornados. In contrast, derivatives cover high-probability events like a dryer-than-expected summer.

RELATED TERMS
  1. Predictive Market

    A speculative market that is based on speculations regarding ...
  2. Financial Analysis

    The process of evaluating businesses, projects, budgets and other ...
  3. Risk Analysis

    The study of the underlying uncertainty of a given course of ...
  4. Insurance

    A contract (policy) in which an individual or entity receives ...
  5. Derivative

    A security whose price is dependent upon or derived from one ...
  6. Futures

    A financial contract obligating the buyer to purchase an asset ...
Related Articles
  1. Options & Futures

    Introduction To Weather Derivatives

    Learn about a financial instrument that makes temperature a tradable commodity.
  2. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  3. Options & Futures

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  4. Options & Futures

    Advantages Of Trading Futures Over Stocks

    We look at the top eight advantages of trading futures over stocks.
  5. Options & Futures

    Top Brokers Offering Tools For Covered Calls

    Here are the brokers that offer the best tools for investors and traders to write covered calls and covered puts.
  6. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
  7. Options & Futures

    Why Trading Coffee Futures Is A Zero Sum Game

    Coffee futures trading is as close to a zero-sum game as you might find in investing. We look at the risks and rewards.
  8. Investing Basics

    What Is Cold Storage For Bitcoin And Why Does It Matter?

    With increasing incidents of hacking in the world of digital currency, cold storage offers a safe place for the cryptocurrency owners.
  9. Options & Futures

    The Perks of Trading Coffee Options

    As more people begin to trade coffee, we explain how coffee options work, who uses them, what drives valuations, and the risks and rewards.
  10. Trading Strategies

    Top Day Trading Instruments

    Day trading is an intense and often appealing activity. Investopedia provides the list of top financial instruments for day trading.

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center