Weather Derivatives and Climate Change

• Activity Number: 309
• Type: Invited
• Date/Time: Tuesday, August 5, 2014 : 10:30 AM to 12:20 PM
• Sponsor: SSC
• Author(s): Robert J. Erhardt*+
• Companies: Wake Forest University
• Keywords: climate model ; NARCCAP ; spatial statistics ; weather risk

Abstract

In this talk we explore weather derivatives and their use in managing weather risk. Weather derivatives are financial contracts whose payments are determined by weather outcomes. Often traded on the Chicago Mercantile Exchange, the size of the weather risk market now exceeds $11 billion US dollars, and continues to expand. By incorporating climate model output, we can begin to explore long term climate change consequences on weather derivatives and their markets. Further, by extending the time horizon of the settlement dates of weather derivatives, we can begin to shift from using derivatives as protection against weather risk to protection against climate risk. An application will explore impacts from projected trends in heating and cooling degree days over North America in the mid-twenty-first-century.