Weather Derivative

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.

BREAKING DOWN '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. Weather Insurance

    A type of protection against a financial loss that may be incurred ...
  2. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  3. Derivative

    A security with a price that is dependent upon or derived from ...
  4. Derivative Product Company - DPC

    A special-purpose entity created to be a counter-party to financial ...
  5. Equity Derivative

    A derivative instrument with underlying assets based on equity ...
  6. Derivatives Time Bomb

    A possibile situation where the financial markets plunge into ...
Related Articles
  1. Trading

    What Is A Derivative?

    A derivative is a security whose price is dependent upon or derived from one or more underlying assets. Learn more on how investors can use this financial instrument in their trading strategies.
  2. Financial Advisor

    SEC Derivatives Rule May Limit Diversification

    The SEC has proposed rules that will limit the use of derivatives by fund managers. Critics believe the rules will impede funds' ability to diversify.
  3. Trading

    6 Weird Futures You Can Trade

    From trading based on weather to the next Hollywood blockbuster, these new derivatives show the investing world's innovation.
  4. Trading

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  5. Trading

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  6. Managing Wealth

    Unusual Assets Owned By Hedge Funds

    Although many hedge funds hold stock in big companies, some hold some extremely unusual investments.
  7. Markets

    Does Weather Affect the Stock Market?

    Find out if the weather can change the stock market, and why economists and meteorologists will probably always struggle to know the answer.
  8. Trading

    Was Buffet Right about Derivatives as WMDs?

    Why Warren Buffet described derivatives as weapons of mass destruction, and when can they be helpful or harmful?
  9. Trading

    Careers In The Derivatives Market

    The growing interest in and complexity of these securities means opportunities for job seekers.
  10. Markets

    Make An Extra $35K A Year In The Most Misunderstood Financial Market

    I want to let you in on a secret: Wall Street doesn't make most of its money from the stock market.#-ad_banner-#While trading equities constitutes a large part of "big banking," ...
RELATED FAQS
  1. What expiry months are typically available for derivatives?

    Discover more about the derivatives market and learn about the varying expiration months for derivatives in different financial ... Read Answer >>
  2. How big is the derivatives market?

    Examine the potential size of the total derivatives market, and learn how different calculations can reduce the estimate ... Read Answer >>
  3. Can mutual funds invest in derivatives?

    Find out about mutual fund investment options, and understand whether mutual funds are permitted to include investments in ... Read Answer >>
  4. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Answer >>
  5. What are the main risks associated with trading derivatives?

    Understand derivatives trading and learn about the primary risks usually associated with trading in the derivatives market, ... Read Answer >>
  6. How does weather impact the share prices of utility stocks?

    Learn how investing in the utilities sector can provide stability to a portfolio; understand the factors that impact stock ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center