Understanding Weather Derivatives By Prof. Simply Simple TMIn the last few years, the monsoons have played truant with us on more than one occasion. But what if your company's bottom-line depended on a ood and timely monsoon!"ven in our advanced, technoloy-based society, we still live larely at the mercy of the weather. It in#uences our daily lives and choices, and has an enormous impact on corporate revenues $ earnins. %ntil recently, there were very few &nancial tools o'erin companies' protection aainst the erratic nature of the weather.(owever, )*eather +erivatives, have chaned all this by providin protection aainst the uncertainties of the weather. -ny derivative product derives its value from some underlyin asset. *eather derivatives use weather conditions.such as city temperature, rainfall and wind speed and so on.to create di'erent /inds of derivative instruments. -lthouh you can0t put a price ta on rainfall or temperature, weather conditions do #uctuate li/e the price of your stoc/s and bonds. That0s what enables the creation of weather derivatives, which wor/ 1ust li/e any other derivative. Sounds 2uite intriuin, doesn0t it!3ow let0s understand better throuh the followin e4ample56et0s say Mr. 7issan is a farmer whose fortunes depend on the arrival of timely monsoons. -lso, lets assume that 8s. 9:: is his overall cost for plowin, sowin wheat etc.If the monsoons are on time he earns, say, 8s. ;::: $ ma/es a pro&t of 8s. 8s. 9::?. But if they are delayed, his earnins could reduce to 8s @::. In this case, he will not be able to even recover his cost of 8s. 9::.(owever his need is to earn at least 8s. 9::A to earn any pro&t.Therefore, he is willin to spend some money if someone can ensure that he ma/es some pro&t =even if its less than 8s.