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. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Exchange Traded Derivative

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

    A type of protection against a financial loss that may be incurred ...
  4. Underlying Asset

    A term used in derivatives trading, such as with options. A derivative ...
  5. Derivative Product Company - DPC

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

    A derivative instrument with underlying assets based on equity ...
Related Articles
  1. Options & Futures

    Any Way The Wind Blows, You Can Trade The Weather

    You can trade on anything these days, including the weather.
  2. Professionals

    What is a Derivative?

    CFA Level 1 - What is a Derivative?. Learn the basicas of derivative instruments. Covers various types of options, swaps and differentiates exchange and over-the-counter trades.
  3. Investing

    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.
  4. Professionals

    Criticisms of Derivatives

    CFA Level 1 - Criticisms of Derivatives. Discusses types of criticisms facing derivatives. Offers contrasting opinions on the use of derivatives and their role in the market place.
  5. Options & Futures

    Derivatives 101

    A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the asset’s price movement with another party.
  6. Options & Futures

    An Overview of Weather Derivatives

    Investopedia explains: Weather derivatives allow businesses to safeguard against unusual temperatures or levels of precipitation that may adversely affect financial performance.
  7. Professionals

    Purposes and Benefits of Derivatives

    CFA Level 1 - Purposes and Benefits of Derivatives. Learn the purposes and benefits of derivatives. Discusses how derivatives can yield profits and be used as a tool for risk management.
  8. Products and Investments

    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.
  9. Professionals

    Derivatives

    CFA Level 1: Section 15 - Derivatives
  10. Investing Basics

    Warrants

    Learn more about this derivative security.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  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. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center