PROJECT REPORT

ON

ANALYSIS ON WEATHER DERIVATIVES AND WEATHER

INSURANCE TRADING IN USA AND INDIA

Submitted in partial fulfillment of the requirements for the award of the

Degree of Bachelor of Commerce (Hons) of Christ University

By

ABHISHEK.R.MOOSAD

Register No: 1210702

Under the guidance of

Mrs. Soumya V

DEPARTMENT OF COMMERCE

Christ University, Bengaluru

2014-2015

DECLARATION

I, Abhishek R Moosad, do hereby declare that the Project entitled Analysis on Weather

Derivatives and Weather Insurance Trading in USA and India has been undertaken by me as

part of my studies in the degree of Bachelor of Commerce (Hons), of Christ University,

Bengaluru. I have completed this study under the guidance of Mrs. Soumya.V Assistant

Professor, Department of Commerce, Christ University, Bengaluru.

I also declare that this work has not been submitted for the award of any degree, diploma,

associateship or fellowship or any other title in this University or any other University.

Place: Bengaluru (Name & Signature of the Candidate)

Date: Abhishek.R.Moosad

Register No: 1210702

ii

CERTIFICATE

This is to certify that the Project submitted by Mr. Abhishek.R.Moosad on the title Analysis on

Weather Derivatives and Weather Insurance Trading in USA and India, is a record of

project work done by him during the academic year 2014-15 under my guidance and supervision

in partial fulfillment of the requirements for the award of the Degree of Bachelor of Commerce

(Hons) of Christ University, Bengaluru. This project has not been submitted for the award of any

degree, diploma, associateship or fellowship or any other title in this University or any other

University.

Place: Bengaluru (Name & Signature of the Guide)

Date: Mrs. Soumya V

iii

ACKNOWLEDGEMENTS

I am indebted to many people who helped me accomplish this project successfully.

First, I thank the Vice Chancellor Dr Fr Thomas C Matthew of Christ University for giving me

the opportunity to do my project.

I thank Prof. Thomas Joseph, Associate Dean, Dr. Nithila Vincent, Head of the Department, Mr.

Girish.S, Coordinator- Honours Programme, Department of Commerce for their kind support.

I thank Mrs. Soumya V for her support and guidance during the course of my project. I

remember her with much gratitude for his patience and motivation, but for which I could not

have submitted this work.

I thank my parents for their blessings and constant support, without which this project work

would not have seen the light of day.

Abhishek R Moosad

Register No: 1210702

Iv

TABLE OF CONTENTS

DECLARATION

ii

CERTIFICATE

iii

ACKNOWLEDGEMENTS

iv

CHAPTER I : INTRODUCTION

1

CHAPTER II : REVIEW OF LITERATURE

16

CHAPTER III : RESEARCH METHODOLOGY

20

CHAPTER IV : DATA ANALYSIS AND

INTERPRETATION

23

CHAPTER V : FINDINGS RECOMMENDATIONS

CONCLUSION

37

BIBLIOGRAPHY

41

CHAPTER 1

INTRODUCTION

1

Introduction

Insurance and derivatives are the most sought after tools to mitigate risk caused by

investments. And one of the most uncertain factors affecting the economy is weather

conditions. Initially started with weather insurance as an option to protect risk from

weather, today investors have different avenues of mitigating risk with the introduction of

weather commodities.

The following chapter will look into the basics of derivatives, evolution of weather derivatives,

its trading activities in various regions, its scope in India and also look into a comparison

between weather insurance and weather derivatives.

1.1 The Financial Markets

The financial market has evolved over the second half of the 20th

century. Most of the people

still associate financial markets with equities. The financial market comprises of not only equity,

but also debentures, bonds, commodities, foreign exchange etc. And amongst all of the financial

instruments available in the global financial market, the growth and popularity of derivatives has

been the most outstanding and also the most remarkable in recent years. And while the growth of

the instrument was hampered by the Global Financial Crisis, the popularity of derivatives had

fallen. Since 2012, derivatives has been growing popular once again, due to much more tighter

regulations regarding futures trading and also of the reason that futures trading mitigates risk

much better than that of the equity counterpart.

1.2 The Various Instruments

1.2.1 Equity Shares:

An equity share, commonly referred to as ordinary share also represents the form of fractional or

part ownership in which a shareholder, as a fractional owner, undertakes the maximum

entrepreneurial risk associated with a business venture. The holders of such shares are members

of the company and have voting rights. Such shareholders take in more risk as there is no

guaranteed dividend payment. And if dividend is paid to equity shareholders, it only after the

company pays interest to debenture and bond holders and dividend to preference shareholders.

2

1.2.2 Preference Shares:

Company stock with dividends that are paid to shareholders before common stock dividends are

paid out. In the event of a company bankruptcy, preferred stock shareholders have a right to be

paid company assets first. Preference shares typically pay a fixed dividend, whereas common

stocks do not. And unlike common shareholders, preference share shareholders usually do not

have voting rights.

There are four types of preference shares: Cumulative preferred, for which dividends must be

paid including skipped dividends; non-cumulative preferred, for which skipped dividends are not

included; participating preferred, which give the holder dividends plus extra earnings based on

certain conditions; and convertible, which can be exchanged for a specified number of shares of

common stock.

1.2.3 Debentures:

It is a type of debt instrument that is not secured by physical assets or collateral. Debentures are

backed only by the general creditworthiness and reputation of the issuer. Both corporations and

governments frequently issue this type of bond in order to secure capital. Like other types of

bonds, debentures are documented in an indenture. The various types of debentures include

Registered Debentures, Bearer Debentures, Secured or Mortgage Debentures, Unsecured

Debentures. Redeemable Debentures, Non-redeemable Debentures, Convertible Debentures,

Non-convertible Debentures.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no

rights to vote in the company's general meetings of shareholders, but they may have separate

meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to

them is a charge against profit in the company's financial statements.

3

1.3 Derivatives

1.3.1 What Are Derivatives

In simple terms a derivative is a financial instrument that mainly used to protect against and

managed risk and very often also serve arbitrage or investment purposes providing various

advantages compared to equity securities. A derivative in definition is a contract between a buyer

and a seller entered in today regarding a transaction to be fulfilled at a future point of time. Over

the life of the contract the value of the derivative fluctuates with the price of the so called

underlying asset of the contract. The use of derivative is that it makes future risk tradable which

in turn eliminates uncertainty through a process commonly known as hedging. These benefits

have led to the widespread use of derivatives because 92% of the world‟s fortune 500 companies

manage their price risk using derivatives.

1.3.2 Underlying Asset:

A term used in derivatives trading, such as with options. A derivative is a financial instrument

whose price is based (derived) from a different asset. The underlying asset is the financial

instrument (e.g., stock, futures, commodity, currency, index) on which a derivative's price is

based

1.3.3 Types of Derivatives Instruments

1. Forward Contracts:

A forward contract is a customized contract between two parties, where settlement takes place on

a specific date in future at a price agreed today. The main features of forward contracts are

They are bilateral contracts and hence exposed to counter-party risk.

Each contract is custom designed, and hence is unique in terms of contract size,

expiration date and the asset type and quality.

The contract price is generally not available in public domain.

The contract has to be settled by delivery of the asset on expiration date.

4

In case the party wishes to reverse the contract, it has to compulsorily go to the same counter

party, which being in a monopoly situation can command the price it wants.

2. Futures:

Futures are exchange-traded contracts to sell or buy financial instruments or physical

commodities for a future delivery at an agreed price. There is an agreement to buy or sell a

specified quantity of financial instrument commodity in a designated future month at a price

agreed upon by the buyer and seller. To make trading possible, BSE specifies certain

standardized features of the contract

What is the Difference between Forward Contracts and Futures Contracts?

Basis Forwards

Nature Traded on organized exchange Over the Counter

Contract Terms Standardized Customized

Liquidity More liquid Less liquid

Margin Payments Requires margin payments Not required

Settlement Follows daily settlement At the end of the period.

Squaring off Can be reversed with any

member of the Exchange.

Contract can be reversed only

with the same counter-party

with whom it was entered into.

3. Options Contracts

Options are of two types – calls and puts. Calls give the buyer the right but not the obligation to

buy a given quantity of the underlying asset, at a given price on or before a given future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying

asset at a given price on or before a given date

.

Futures Forwards Basis

5

4. Swaps

Swaps are private agreements between two parties to exchange cash flows in the future

according to a prearranged formula. They can be regarded as portfolios of forward contracts. The

two commonly used swaps are interest rate swaps and currency swaps.

Interest rate swaps: These involve swapping only the interest related cash flows between

the parties in the same currency.

Currency swaps: These entail swapping both principal and interest between the parties,

with the cash flows in one direction being in a different currency than those in the

opposite direction.

1.3.4 Futures: Types of contracts

Depending on the type of underlying asset, there are different types of futures contract available

for trading. They are:

Individual stock futures:

Individual stock futures are the simplest of all derivative instruments. Stock futures were

officially introduced in India on 9th November 2001. Before that, the local version of stock

futures called „badla‟ were traded which was eventually banned by the Securities Exchange

Board of India in July 2001.

Stock index futures

Understanding stock index futures is quite simple if you have understood individual stock

futures. Here the underlying asset is the stock index. Stock index futures are more useful when

speculating on the general direction of the market rather than the direction of a particular stock.

It can also be used to hedge and protect a portfolio of shares. Although stock index is traded as

an asset, it cannot be delivered to a buyer. Hence, it is always cash settled.

6

Commodity futures.

The underlying asset would be a commodity like gold or silver. In India, Commodity futures are

mainly traded in two exchanges – 1. MCX (Multi commodity exchange) and NCDEX (National

commodities and derivatives exchange). Unlike stock market futures where a lot of parameters

are measured, the commodity market is predominantly driven by demand and supply.

The term „commodity‟ is a very broad term and it includes –

Currency futures:

A transferable futures contract that specifies the price at which a currency can be bought or sold

at a future date. Currency future contracts allow investors to hedge against foreign exchange risk.

The MCX-SX exchange trades the following currency futures:

1. Euro-Indian Rupee (EURINR),

2. Us dollar-Indian rupee (USDINR),

3. Pound Sterling-Indian Rupee (GBPINR) and

4. Japanese Yen-Indian Rupee (JPYINR).

Bullion Gold and silver

Metals Aluminum , copper, lead, iron, steel, nickel, tin,

zinc

Energy Crude oil, gasoline, heating oil, electricity,

natural gas

Weather Carbon

Oil and oil seeds Crude palm oil, kapsica khali, refined Soya oil,

Soya bean

Cereals Barley, wheat, maize

Fiber Cotton, kapas

Spices Cardamom, coriander, turmeric etc.

7

Interest rate futures

These are futures based on interest rates. In India, interest rates futures were introduced on

August 31, 2009.The logic of underlying asset is the same as we saw in commodity or stock

futures – in this case, the underlying asset would be a debt obligation – debts that move in

value according to changes in interest rates (generally government bonds). Companies, banks,

foreign institutional investors, non-resident Indian and retail investors can trade in interest rate

futures. Buying an interest rate futures contract will allow the buyer to lock in a future

investment rate

1.4. Weather Derivatives- An Introduction

1.4.1 What is a Weather Derivative?

It is estimated that nearly one third, or $3.8 trillion, of the U.S. economic activity is exposed

to the weather. And in 1997 derivatives took a new lead as it was in this year that the financial

markets were introduced to weather derivatives. Unlike regular derivatives the futures

contracts use weather as an underlying factor. The main benefit of weather derivative is that it

helps business prevent or mitigate risk and reduce the losses and damages that they face due

to uncertain weather conditions. This weather derivative is also used as a tool of insurance and

over the years companies have started to prefer weather derivatives over traditional insurance

based on weather as weather derivatives provide a cheaper and a better alternative to the

companies.

1.4.2. Where are such derivatives traded?

In 1999, the Chicago Mercantile Exchange (CME) took weather derivatives a step further and

introduced exchange-traded weather futures and options on futures - the first products of their

kind. OTC weather derivatives are privately negotiated, individualized agreements made

between two parties. But CME weather futures and options on futures are standardized contracts

traded publicly on the open market in an electronic auction-like environment, with continuous

negotiation of prices and complete price transparency.

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1.4.3 To which all Industries are Weather Derivatives Useful?

Risk Holder Weather Type Risk

Energy Industry Temperature Lower sales during warm winters or cool

summers

Energy Consumers Temperature Higher heating/cooling costs during cold

winters and hot summers

Beverage Producers Temperature Lower sales during cool summers

Building Material Companies Temperature/Snowfall Lower sales during severe winters

(construction sites shut down)

Construction Companies Temperature/Snowfall Delays in meeting schedules during

periods of poor weather

Ski Resorts Snowfall Lower revenue during winters with

below-average snowfall

Agricultural Industry Temperature/Snowfall Significant crop losses due to extreme

temperatures or rainfall

Municipal Governments Snowfall Higher snow removal costs during winters

with above-average snowfall

Road Salt Companies Snowfall Lower revenues during low snowfall

winters

Hydro-electric power Gen. Precipitation Lower revenue during periods of drought

1.4.4 Advantages of Weather Derivatives:

1. They are a better alternative as compared to traditional weather insurance.

2. They help in mitigate risk.

3. They are very helpful for industries that rely on weather patterns.

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1.4.5 Disadvantages of Weather Derivatives:

One of the main difficulties in using weather derivatives as a cross-commodity hedge is in

deciding the model risk inherent in determining how much of the risk can be effectively hedged

using a weather contract

1.4.6 Types of Weather Derivatives Commodities:

Weather Comodities Underlying Asset

1. Sunshine Precipitation:

2. Heating Degree Days

3. Cooling Degree Days

4. Growing Degree Days

5. Maximum Temperature

6. Average Temperature

7. Snowfall Percitipation

Sunshine

Summer Temperatures

Winter Temperatures

Rainfall

Temperature

Temperature

Temperature

Snow(Winter)

1.5 Weather Derivatives in Different Markets:

1.5.1: The US:

The first transaction of weather derivative in the US market took place in1996. The majority of

contracts in US are for the winter months. Hence heating degree days make about 60% of the

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deals whereas cooling degree-days make about 30% till date the US market is dominated by the

big energy companies who hedge their risk exposure to mild winters.

The free dissemination of information and easy availability of high quality data has enabled a

wider spread of the weather market in US. With the increased transparency and liquidity more

speculative players came into the market.

1.5.2: The European Market:

The first European transaction was a swap in 1998 between Enron and Scottish Hydro Electric.

The growth of the weather derivative market within Europe is mostly restricted to France and

UK with Scandinavian countries and Germany closely behind. Most of the European deals are

OTC. According to WRMA survey 2001 the total European market deals are around 765

contracts that is an increase of over 345% in terms of number of contracts. Just like the US

market most of the contracts in Europe continue to be temperature based. Amongst the

temperature based contracts the proportion of rain, snow and wind contracts have increased. But

the take-off speed is slow in Europe as compared to US market. The most important reason being

lack of reliable, standardized and inexpensive weather data. The data issued by the Met Offices

is not standardized and it can only be obtained by going to a particular office. Also there is a

difference in the recording times of max/min temperatures for each country. Apart from this, a

country can shut down or change the location of its weather station without any prior warning.

The definition of daily average temperatures differ from country to country which is again a

hindrance to the growth of the market. Differences in data cleaning practices, different formats of

data, long delivery time to obtain data and lack of good quality historical records are other

serious problems. To overcome these issues ECOMET- an economic weather group comprising

of 20 members countries was established in 1995 to ensure free, unrestricted exchange and

widest availability of meteorological information between the national meteorological stations

for commercial applications. Furthermore to make the existence of standardized contract more

convenient LIFFE has developed pan-European weather futures which would also lead to an

increase in size of the overall weather derivative market.

11

1.5.3. The Asian Pacific Market:

The first Asian transaction took place outside the energy market. The transaction was executed

between a Japanese ski resort and a Societe Generale in Nagano for protection against low

snowfall in December 1999. The trade in Japanese weather derivative market reached a total of

2100 contracts in 2003 that is approximately 150% of the previous year. Japan being a pioneer in

the Asia Pacific weather derivative market has a total notional value of weather contracts to a

tune of $420 million in 2003.

According to the Asia Pacific Committee review the Japan market has few unique

characteristics. Firstly, the weather derivative product has a wider reach in the market because it

reaches the end users as a risk management tool through the network of major commercial banks

and non-life insurance companies which usually have a tie up with regional banks. Secondly,

unlike the US market which is mostly dominated by giant energy companies the Japanese market

is primarily dominated by small and medium sized companies with small pay outs and premiums

across a wide range of industries.

Thirdly, Japan has also developed a new legislative framework for investor protection wherein

the weather derivative are subject to the exchange law (passed in Diet) and investors are

classified into professional and general with stricter obligations to be imposed on general

investors. The only problem to be dealt in future is of limited market liquidity which is mostly

because of limited development of a secondary market

The market situation outside Japan also seems to be blooming. In Taiwan the weather derivative

products are approved by a competent authority and a type of weather index insurance has

already been launched. Whereas in Korea weather derivative product have not been approved

officially. The Korean insurance companies are allowed to sell index based weather insurance

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1.6 Weather Derivatives Scenario in India

1.6.1 Introduction

The derivatives trading in India is only recent and not fully realized its true potential. The Indian

stock market is the largest in Asia .But Indian investors prefer to trade only in debentures and

equities because they prefer a steady return from their invested capital. While derivative trading

with gold as an underlying asset has grown over the years SEBI has still not permitted trading

with weather derivatives because as per SEBI guidelines it is illegal for an investor to prepare

future contracts on uncertain and intangible assets. Since weather is uncertain such derivatives is

not introduced in India as of 2014.

1.6.2 Why it will be Useful in the Indian Financial Market:

Since weather derivatives have only been introduced 18 years back they are only available in

developed financial markets such as that of US, UK, Japan and Australia. The reason for

introduction of weather derivatives in such markets was because the weather conditions of those

countries are very uncertain and unpredictable in nature. With regard to weather derivatives in

India it will have immense potential to be successful because such derivatives will help in

reducing the risk and losses suffered by the agricultural sector in India relies heavily on monsoon

weather. And since the rains are uncertain that does not guarantee farmers a good harvest. Due to

lack of education as well as money such farmers find themselves unable to protect their harvest

by insuring them since insurance premium on crops are beyond the earnings capacity of the

farmers. Introduction of weather derivatives to such farmers will be beneficial because they

would only have to pay only if the conditions of the contract are fulfilled for example, farmer A

and farmer B enter into a contract where farmer A agrees to purchase the tomatoes from farmer

B where the price of the tomatoes will increase by Rs 10 per kg only if it rains during the months

of July and August. The contract was entered on 1st June and the contract ends on 1

st September.

On 2nd

September it was found that it did rain during those two months and that the price of the

tomatoes had actually fallen due to low demand. As per the contract farmer B will be benefited

as he fulfilled the conditions of the contract and therefore he will be able to sell the tomatoes at

the agreed price. Here the underlying factor was rain which is a weather condition and as such a

transaction was executed based on something while uncertain is also beneficial in nature.

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In India research has been conducted whether such derivatives will be beneficial for the

agricultural sector. But apart from agriculture various other industries such as retail,

construction, shipping and transportation are also affected due to uncertain weather conditions

and such industries are even more volatile and more prone to suffer losses due to uncertain

weather conditions.

1.7. Weather Insurance vs. Weather Derivatives:

1.7.1 Introduction

Most industries, especially the agrarian, construction and energy industries weather play a major

factor which determines the production and profitability of such industries. Therefore weather

plays a major risk factor. It is estimated that $3 trillion of the $16 trillion US economy is

vulnerable to weather conditions. Therefore it was with that reason that both individuals and

large corporations started to protect their assets with weather insurance. But with the growth of

the financial market in the late 1990s resulted in the rise of weather derivatives and is now being

preferred as an alternative to weather insurance for those having greater risk appetite and higher

returns.

1.7.2 Weather Insurance:

A type of protection against a financial loss that may be incurred because of rain, snow, storms,

wind, fog, undesirable temperatures or other adverse, measurable weather conditions. Weather

insurance is used to insure an expensive event that could be ruined by bad weather, like an

outdoor wedding or an outdoor film production.

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1.7.3 Weather Insurance vs. Weather Derivatives

Insurance

Weather Insurance

Weather Derivatives

Eligibility to Purchase

No minimum eligibility standards,

although Vortex only offers

commercial line policies at this time

(no personal lines)

Must meet certain financial

sophistication eligibility standards,

typically must have at least $10

million of assets or $1 million of net

worth

Accounting and Tax Treatment

Premiums typically expensed over

policy life, recoveries not typically a

taxable gain

Treated as an investment, typically

valuated using mark to market and

recoveries generally create a taxable

gain

Liquidity

Illiquid, effectively a buy and hold

instrument; Coverage is non-

cancelable

Greater liquidity than insurance,

standard contracts are traded on an

exchange, not necessarily a buy and

hold instrument

Flexibility

Limited to the purchase of insurance

covering measured weather element

or combination of elements

Can be bought or sold, indexed on a

virtually unlimited array of weather

variables, no-premium options (swaps,

collars) are available as are look-

backs and no-claims bonuses

Regulatory Controls Significant, including state insurance

commissioners

Currently minimal, sold in many cases

under exemptions recognized by the

Commodity Futures Trading

Commission

1.7.4 Growth of Weather Insurance in India:

In India, the primary sector is the largest employer. It is this very same sector that is also

providing the least contribution to the Indian GDP. And while the farmers blame poor weather

conditions for their lack of harvest and income, the main reason is due to lack of insurance and

also the farmers over reliance on informal sources of obtaining loans. Seeing the success of

ClimateCorp, a US based weather insurance firm, in 2005, ICICI Lombard became the first

private insurance firm to provide insurance products based on weather patterns. Currently the

weather insurance products offered by ICICI are rainfall insurance. Following ICICI Lombard‟s

success HDFC ERGO also started providing weather insurance. The weather insurance concept

is currently applied to farmers and agricultural industries.

15

1.7.5 Scope for Weather Derivatives as an Insurance Tool in India:

Like the US, the Indian economy is also vulnerable to weather conditions as severe weather

conditions damage the infrastructure and cost millions to the Indian GDP. As such there is heavy

demand for such markets to initiate trading with such commodities. And the reason weather

derivatives would be a successful alternative to weather insurance in the Indian financial market

is because it is a less costly than weather insurance, since weather insurance requires premium

payment with no guarantee of the amount being obtained as compensation. The weather

derivatives will not only mitigate the risk of that particular underlying weather condition like

insurance but it will also guarantee the investor a return higher than the initial investment.

Therefore the option of weather derivatives is very much suitable for Indian Investors who prefer

higher returns at a lower risk.

1.7.6 Obstacle for Growth of Weather Derivatives and Weather Insurance:

In 2005, Rabobank India had filed an application to the Forward Markets Commission (FMC) of

India to start weather derivatives trading in India by offering Monsoon contracts. The FMC had

approved and allowed the bank to be certified to offer weather futures to Indian investors. FMC

approved the bank back in 2006. As of 2015, the Indian government has yet to officially start

allowing investors to trade with weather derivatives. The main reason for the blockade of growth

is because the Indian Commodities Markets do not have the adequate infrastructure requirements

to calculate the probability of weather patterns. Another reason is due to a regulation of SEBI

which forbids investors to have contracts where the underlying asset is intangible in nature.

Weather Insurance has been allowed in the Indian market, but it is only limited to agriculture as

other participants of other industries are not allowed to obtain weather insurance. The reason is

because the weather insurance is at its initial phase and over time the product will be available to

other industries

CHAPTER 2

REVIEW OF LITERATURE

16

Review of Literature

(Paul 2013) article “A Study on the Feasibility of Weather Derivatives in India”, is one of the

few research articles that explain on the implication of weather derivatives on the Indian

economy, which is the scope of this research paper. The main objective of this thesis was to

verify whether the Indian market had the potential for weather derivatives and also whether

such derivatives will be beneficial to the Indian economy. The findings from this research

paper provide valuable information as the article indeed assures that the introduction of

weather derivatives will have immense benefits of the Indian economy especially to the

agricultural sector. The author focused his findings on the benefits of weather derivatives on

the Indian agricultural sector, which is India‟s largest employer but at the same time India‟s

least contributing sector to the GDP. The author implies from the findings that the

introduction of weather derivatives will help in increasing the productivity of the farmers and

also reduce the exploitation of middle men. It will also have financial benefits for the farmers

as this will help them in reducing the dependency on loans from banks and money lenders

which charge high interest rates. The findings also implies that while the Indian economy will

benefit from weather derivatives, the Indian economy is still not yet ready to start trading with

such instruments as the Indian financial markets lack the adequate infrastructure and also the

law which doesn‟t allow trading on intangibles such as rain. For the purpose of this research

the author relied on secondary data mainly from various other authors mostly from the USA,

where the study of weather derivatives is more in-depth. Main sources of data where relied

from Opportunities and Priorities in a New Era for Weather and Climate Services” by Dutton,

which clearly explains that the USA has successful weather derivatives market due to 30% of

the economic activities in the US being depended on the factors of weather. The choice of the

author using secondary data is due to the fact that the Indian population is highly unaware of

the futures trading and as such won‟t be able to get reliable data from primary sources. While

this thesis provides a lot of information on the importance of weather derivatives in the Indian

economy, like most papers the author only looked into the aspects of the Indian farmers and

the agriculture sector. One suggestion would be that the author should have looked into the

implications of the weather derivatives on other industries such as construction, retail,

infrastructure etc.

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(Vedenov and Barnett 2004) article “Efficiency of Weather Derivatives as Primary Crop

Insurance Instruments” differs from the other papers as this article explains the scope of using

weather derivatives as a tool of insurance rather than as a financial instrument. The main

objective of the thesis is to analyze the failure of private insurance firms to provide insurance on

crops and also fully understand the benefits of weather derivatives as an insurance mechanism.

Through their intense research, their findings provide valuable information. One such

information is that using weather derivatives as an insurance tool has more benefits than

traditional crop yield insurance as they provide higher returns. And also here is no need for farm-

level loss adjustment and this greatly reduces transaction costs relative to crop yield insurance.

The value of the index does not depend on the individual actions of market participants. The

findings also suggest that the market is still limited, even in the USA and Western Europe as

there is no awareness of this option and as such the implementation of such a mechanism has a

long way to go. The authors mainly relied on secondary data from various journals and ledgers

and also used various equations to verify the theory. Like most authors again, this thesis focused

on the implications of such instruments for agriculture. The authors failed to analyze the fact

other industries are also deeply affected by weather and as such the other industries can also use

this as an insurance tool to cover the losses caused by weather conditions.

(Considine 2014) article “Introduction to Weather Derivatives” objective is to provide

rudimentary understanding of weather derivatives, its possibilities and benefits on the financial

markets. This article was published at the time when the concept of weather derivatives was at its

initial stages. The findings of the article give an insight on the emergence of the futures. One

finding suggest that the concept is only recently introduced as weather trading began only by the

year 1997. As such the findings say that the concept took time to establish itself successfully in

the major financial centers such as London, New York and Tokyo. The article also gives

valuable findings with regards to pricing mechanism of such instruments. The findings of the

article are mainly towards establishing a pricing mechanism of such instruments. As such the

article doesn‟t explain the impact of such derivatives on the investors or to the economy. The

research methodology applied here is primary source as this author obtained information from

the meteorologists and from investors, since the article doesn‟t give a hint of any outside

reference

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(AFMS 2014) “Weather Risk Management” was prepared as a prospectus to the Australian

citizens on the importance of weather trading in the Australian economy, which is the objective

of the article. This scope of the article ranges from analyzing the historical roots of weather

trading in the late 1990s. The article provides numerous findings on the impact and importance

of weather derivatives in form of cases and examples, the main example being that of

Agribusiness, where GTL buys a precipitation cap that pays $100,000 for each mm in excess of

50mm which is the rainfall level above which overall profitability begins to decline sharply. This

example which is clearly written in the article indeed highlights the importance of weather

derivatives not only for the Australian economy but also for the citizens of the country as such

instruments reduce business risk caused by natural factors(rain, wind etc).

(Gandal.S 2014), “How Wall Street got snowed on weather derivatives” explains the rise, fall

and the revival of the snow derivatives trading in the US stock exchange. The scope of the article

covers the rise, importance as well as the reason for the downfall of the snow arc instruments in

the NASDAQ and NYSE. One of the key findings from this article is the huge impact the change

of the weather that determines the popularity of the weather instrument for the investors. The

findings state the early rise of snow derivatives as a tool for futures contracts and as an insurance

tool was because such instruments provided a risk eliminating option for business affected by the

snow storms. But with the snow gradually declining in the US off late, the demand for snow

based futures contracts declined.

(Francisco 2010) of Stanford University and by Hayoung Yun(2010) article, Evidence from

Weather Derivatives explores the possibility of introduction of weather derivatives for the

electric and gas industries. The scope of the article covers from the introduction of weather

derivatives as well the importance of the weather derivatives in the volatile commodities such as

crude oil. The findings of the article show the interpretation of the weather derivatives equation

when applied on industries such as oil production. This finding is a break though of the research

because this article gives the idea that weather derivatives do have an impact on construction

industries

19

(Ferrer 2001) “Hedging Corporate Revenues with Weather Derivatives-A Case Study” covers

from the purpose of weather derivatives in the stock market to analyzing the hedging aspect of

weather derivatives. The findings from this article state that most hedge fund managers lack the

basic knowledge on using weather derivatives for the purpose of hedging funds to prevent

offshore risk. The article also concludes from the findings that most hedge fund managers merely

use weather derivatives as a tool for speculation, as such resulting in losing the potential of

earning from the hedge funds due to the uncertainty and the risk associated with weather

(Choksi 2012) article “Emergence of Weather Derivatives-Feasibility in Indian Context” looks

into the urgent need for weather derivatives in Indian financial market. The scope of the article

covers from the utilization of such contracts in India as well its implications and the reason for

the slow progress of its introduction in India. The findings from the article clearly explains the

reason for the slow process in the introduction of weather derivatives in BSE and NSE, the

reason being due to lack of awareness of derivatives trading by Indian Investors and also the lack

of access of FDI and adequate infrastructure facilities to trade with weather commodities.

CHAPTER 3

RESEARCH

METHODOLOGY

20

Title:

Analysis on Weather Derivatives and Weather Insurance Trading of USA and India

Statement of Problem:

Weather plays a major factor in effecting productivity of the nation. In fact a third or $3.8 trillion

of the US economy is affected by weather. Weather conditions can cause major risks to both

individuals and business establishments in form of damages to property, delay of productions

sales of goods etc. Therefore majority of the investors would choose to invest in weather

commodities to mitigate risk caused by weather conditions.

While the scope is there in India, not many researchers have conducted a full comparison study

as to what tool is better to mitigate risk, either weather insurance or weather derivatives.

Therefor e it is very important that to conduct this as this can help in making the Indian financial

markets more diversified and will also help in Indian Investors protect their business from

weather conditions.

Objective:

The overall objective is to analyze the weather derivatives and weather insurance markets of

USA and can be potential in the Indian Financial Market.

Specific Objectives Include:

1. To understand the importance of weather derivatives and weather insurance.

2. To understand the mechanism of weather derivatives trading in USA.

3. To analyze the progress of weather Insurance in India.

4. To compare weather insurance with weather derivatives in USA.

21

Scope of Study:

The study is conducted to analyze Weather Derivatives and Weather Insurance trading in the

USA and its potential in the Indian Financial Market. The following project will include data

about the growth of weather derivatives and weather insurance, the success of weather

derivatives market in the US, the various weather derivatives products and a comparison study

on the popularity of weather derivatives and weather insurance as a tool to mitigate risk.

The study will also include the limitations of weather based commodities trading in India, its

challenges and recommendations to make weather trading more flexible in India.

Research Methodology:

The following research will be a descriptive research which will include primary and secondary

data. Since most of the data is obtained from secondary sources, there is no need to use sampling

techniques.

The primary data is collected in form of Interview from 2 major corporations in the USA. which

are:

1. Interview with Charles Pizecor- Director of Research and Product Development –CME.

2. Interview with an Associate from Climate Corp-A major weather Insurance firm.

The secondary data is also obtained from various journals and publications of researchers in the

field of metrology and futures trading.

Data with regard to Indian scenario of weather insurance are obtained from ICICI Lombard and

journals.

22

Limitations of Research:

1. The lack of data with regard to weather commodities trading in India.

2. Since the data for the research is mostly secondary sources there are chances for error.

3. Time allotted for the study is limited so as to obtain primary data.

4. Most of the information available is classified information, hence limited access.

5. Lack of Data from SEBI or FMC makes it very difficult to obtain data for India.

CHAPTER 4

DATA ANALYSIS AND

INTERPRETATION

23

Introduction:

The data for this project is obtained from both primary and secondary sources. The primary data

is form of an interview and the analysis is descriptive in nature. The graphs for the first set of

primary data are the data shared by Mr. Charles with reference from the CME journals. The

remainder of the analysis is the prepared from the data obtained from secondary sources.

Primary Data:

1. Interview with Charles Pizecor-Director of Weather Research-Chicago

Mercantile Exchange (CME).

The following interview was a phone interview to Mr. Charles Pizecor where he was located at

the Global HQ of CME in Chicago.

Question 1: Does CME trade with weather commodities and provide weather insurance?

A. : CME trades with temperature based commodities only. Weather insurance products are

provided by insurance companies such as Climate Corp etc.

The above graph shows the growth of weather derivatives traded in CME before the financial

crisis in US (Figure 1)

$2.50 $4.10 $4.20 $4.70 $9.70

$45.20

$19.70

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

2000 2001 2002 2003 2004 2005 2006

Volume Traded (in $ Billions)

Volume Traded i(n $…

24

Table 1: Volume of Weather Derivatives Traded in CME

Year Value Traded(in $ Billion)

2000 $2.5

2001 $4.1

2002 $4.2

2003 $4.7

2004 $9.7

2005 $45.2

2006 $19.7

Question 2: In the US do investors prefer trading in weather insurance or weather

derivatives as an option to mitigate risk cost by weather?

A. In the US weather plays a major factor in the overall economy. Most of the industries or

individuals do prefer their business against the losses caused my weather.

But it also depends on the location of such individuals or enterprise. In terms of industries if the

vicinity of the industry is located where CME has listed then they choose to trade with

temperature commodities. Since there are locations where CME is not listed they would prefer

private OTC trading offered my climate corporations.

Locations as to where CME futures can be traded In US.

25

(Source: Weather Products Dog Days and Degree Days, J. Scott Mathews)

(Source: Weather Products Dog Days and Degree Days, J. Scott Mathews)

Question 3: Which are the most popular weather commodities traded in CME and how are

they calculated?

A. HDD and CDD.

HDD or Heating Degree Days is the number of degrees that a day‟s average temperature is

below 65 degrees Fahrenheit (18 degrees Celsius).The price of weather derivatives traded in

winter is based on an index made up of monthly HDD values. The settlement price for a weather

futures contract is calculated by summing HDD values for a month and multiplying by $20.

In the same way CDD Cooling Degree Days is the number of degrees that a day‟s average

temperature is above65 degrees Fahrenheit( 18 degrees Celsius).The price of weather derivatives

traded in summer is based on an index made up of monthly CDD values. The settlement price

for a weather futures contract is calculated by summing CDD values for a month and multiplying

by $20.

26

(Source: Weather Products Dog Days and Degree Days, J. Scott Mathews)

The equation is applied to all weather commodities traded all around the world where CME is

located. This equation can be helpful to calculate the weather patterns in India, as it is a country

that is heavily affected by weather conditions and as such this equation can help such investors in

India make safer decisions and avoid risks associated by weather.

This the CDD monthly average table prepared by the CME on July 2009

(Source: Weather Products Dog Days and Degree Days, J. Scott Mathews)

27

A graphical representation of the Monthly CDD of 2 US cities

(Source: Weather Products Dog Days and Degree Days J. Scott Mathews)

.

Question 4: Which are the top five industries which require temperature commodities to

mitigate risk and why?

A. In the United States Weather Derivatives are mainly traded among major industries.

The top 5 Traders of Weather commodities are

1. Power Sector: The market for weather derivatives arose in the U.S. in mid-1997 as a

result of the liberalization of the energy and power sector, which led to the national

supply monopolies being converted into separate, legally independent utility companies

operating on the principles of the market economy. The power sector depends on weather

to supply energy as any weather conditions can cause disruption or supply. Eg During

28

winter extreme temperatures and snowfall can cause power cuts and supply shortages.

Therefore power companies would mitigate such risk with HDD commodities.

2. Energy Sector: The energy sector which includes oil and gas are also key traders of

weather based indexes because most of their business is located on the off shore areas of

US and weather is more volatile in such areas then inland. Such industries prefer trading

on Monsoon commodities futures.

3. Construction Sector: The construction sector is heavily reliant on weather conditions as

weather can cause a construction project to be delayed for months and can also lead to

termination of the construction contract. As such many construction companies hedge

their risks by purchasing HDDs, CDDs and also catastrophe Bonds.

4. Retail Sector: Weather plays a major factor in retail as bad weather conditions can reduce

the demand for the particular product hence hampering sales. The best example can be

that of the reduction of demand of umbrella due to lack of rain,

5. Hedge Fund Investors: These investors can be holding companies and insurance

companies who make income on trading weather based futures commodities.

Table 2: Top 5 Industries Trading Weather Derivatives (from High to Low)

Industry Share of Trade in CME (in %)

Power Sector 35%

Energy 28%

Construction 16%

Retail 12%

Hedge Fund Investors 9%

29

Figure 2

Question 5: Agricultural industries are heavily affected by weather patterns and conditions

yet it is not included among the top 5 traders. Why?

A. Most of the farmers are located in areas where CME is not listed. Due to lack of access

they are not aware of the products not offered by CME. And as such weather insurance

provides a better alternative for farmers to mitigate risk.

Question 6: CME has established in international locations. When investors are trading

does CME offer weather products sold in the US or does it allow to trade temperature

commodities of that particular international location.

A. CME provides both US based weather commodities as well as weather commodities

exclusive of that particular location. Example in Australia bush fires is common due to

extreme summer temperature and as such it can cause extensive damage and risk to major

industries as well as individual property. As such CME offer CDD commodities on bush

fires, which are exclusive to the Australian Market and is not available in the US.

Question 7: Why has CME not established operations in India?

A. Although the potential for weather derivatives and weather based futures trading has huge

potential in India due to the country‟s extreme weather conditions, the Forwards Market

Commission of India, India‟s governing body on Forwards trading has not yet granted

CME the license to operate commodities trading in India. Also as per the current

guidelines, it is illegal to have contracts where the underlying the asset is intangible in

nature.

35%

28%

16%

12% 9%

Percentage of Total Weather Derivatives Traders in USA

Power Sector

Energy

Construction

Retail

Hedge Fund

30

2 Interview with an Associate of Climate Crop:

Question 1: Do you provide pure weather based insurance in the US?

Climate Corp has been one of the first and the largest companies providing weather insurance.

The Total Weather Insurance product is purely based on weather conditions. To offer that

product, a survey was conducted to identify the demand by the citizens of the US were interested

in TWI. The results were concluded stating that for the year 2014-2015, the demand for TWI was

only by 12% of the total customer base in the US. Since it was below the bench mark, the TWI

product was removed from Climate Crop product listing.

TWI mechanism by Climate Corporation

(Source: https://gigaom.com/2013/02/06/why-big-data-matters-and-data-ism-doesnt/)

31

Question 2: Why has the demand for TWI fallen in the US?

There are three reasons why the demand for TWI has fallen in the US.

1) Most of the farmers felt that TWI is becoming more risker due to the increasing uncertainty in

the weather conditions and as such felt that the farmers would not get the expected returns from

the premiums of TWI.

2) A federal government project has been introduced in 2013, which has made crop yield

insurance more affordable to farmers. This was done so as to increase farm productivity in the

US.

3) The farmers also believe that crop yield insurance can be a less risky because farmers can use

better production techniques in order reduce the risk and also get better returns.

Figure: 3

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

$20.00

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Cost of Crop Insurance in US (in $ billion)

Cost of Incentives (in $billion)

(Source:Google)

32

Table 3: Cost of Crop Insurance in US

Year Cost of Incentives( in Billions)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

$2.5

$2.7

$4.0

$3.0

$3.0

$2.4

$3.2

$3.2

$8.0

$5.1

$4.5

$10.3

$17.5

Question 3: How is Crop yield Insurance Better than TWI?

As per the survey conducted, it was found out that the return from TWI products were negligible

and as such farmers started looking for insurance products that would reduce the risk by

changing their techniques of production. With that farmers can assure that the amount invested

as premium can be obtained.

The best example for this are from the wheat cultivation farmers located in the Midwest US. In

the year 2012 the farmers took a TWI premium of $500,000 where the famers would get

compensation if the rainfall was below an average of 55 cm during the rainy season. The biggest

drawback here is that weather is uncertain and unpredictable in nature; the risk of rainfall

precipitation is high. And during the rainy season of 2012, the rainfall precipitation average was

52cm. Since it was above the average stated by Climate Corp, the farmers lost $ 500,000 because

of the slightly above rainfall precipitation.

33

In 2013, to address this issue Climate Corp started offering crop yield insurance where the

insurance compensation is calculated on the Total harvest of the farmer. The farmer seeing that

he lost $ 500000 last year decided to hedge his risk of his crop cultivation with a basic yield plan,

where the farmer would get compensation if his total production was less than an average of 2

quintals of wheat. The farmer insured $ 100000 on this plan. During the harvest season, the

farmer had an average production of 1.7 quintals of wheat. The average production was below of

that of the minimum quantity stipulated in the insurance contract. This has helped the farmer in

claiming compensation of $100000 to cover up for the losses on sales he could have obtained

from the unsuccessful harvest.

The main reason why crop yield insurance is preferred over TWI insurance is because the

farmers can actually control their crop yield based on demand and supply. From the above the

farmer might have predicted that the demand for wheat has fallen. This would have helped the

farmer in actually controlling the yield so as to ensure that the production of wheat falls below 2

quintals.

The Federal government is giving proper training to these farmers so as to ensure that they can

plan their production in order to have an advantage in obtaining compensation.

34

Secondary Data: Weather Risk Management Association-PWC

Table 4: Total Value of Weather Derivatives Traded

Source: WRMA

WRMA, which is Weather Risk Management Association with association of Price WaterHouse

Coopers, estimated the value of weather derivatives traded from 2003-2010 in their annual

reports.

The overall trade of weather derivatives in 2003 was only $4 billion, which was way less than

the $19 billion average traded over 8 years. The height of the boom on weather derivatives was

in 2007, a year before the financial crisis. This was because of the shift of investors from weather

insurance to weather derivatives since it provided higher returns. The value traded fell again

below average in 2008 to only $15 billion, mainly contributed by the collapse of major

investment banking firms due to the global financial crisis.

The figures in 2009 were the worst since the demand for such commodities fell due to loss of

confidence among investors on the regulations with trading of weather based futures

commodities. The latest figure available, which is 2010 shows that the market is slightly

recovering from the shock as the value traded, increased by $2.4 billion.

Year Traded Value(in US $ Billion)

2003 $4

2004 $10

2005 $45

2006 $19.6

2007 $32.1

2008 $15

2009 $11

2010 $13.4

Average traded Value $19

35

Figure 4

(Source: WRMA annual survey undertaken by PriceWaterHouseCoppers)

$4

$10

$45

$19.60

$32.10

$15

$11

$13.40

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2003 2004 2005 2006 2007 2008 2009 2010

Total Value of Weather Derivatives Market

Traded Value(in Billions USD)

36

Secondary Data: Weather Insurance in India

Statistics from ICICI Lombard

ICICI Lombard was the first private insurance company to authorize weather insurance to

farmers in India.

The following are the deals initiated by ICICI with the farmers of India:

Oranges Farmers in Jhalawar, Rajasthan:

Total Farmers in

the Area

Total Farmers

covered with WI

Farmers covered

with WI (in %)

Area Covered (in

hectares)

Premium

Amount(in Rs

Million)

11171 782 7% 613 18.3

Farmers in Andhra Pradesh

Total Farmers

covered with WI

Area Covered (in

hectares)

Premium

Amount(in Rs

Million)

800 1100 5.7

The above tables indicate that while majority of farmers in India are dependent on weather for

production of crops, the total number of farmers covered with weather insurance is only

marginal. From the statistics regarding the orange cultivators, the number of farmers covered

with weather insurance is less than 1000 (782). This indicates that the weather insurance is not

yet as popualar as it should be as there is little growth over the past 10 years since weather

insurance was introduced in India

CHAPTER 5

FINDINGS

RECOMMENDATIONS

CONCLUSION

37

Findings

From the data analysis, the following were found:

1. Weather Derivatives in the US are traded only at major cities such as New York, Chicago

Atlanta etc. The farmland locations in the US still continue protecting their risk against

weather with weather insurance.

2. The value of weather commodities traded in CME indicate that the weather trading in the US

is largely successful due to investor confidence and also understandig the impact of climate

change it has on the business establishments.

3. Pricing on weather derivatives commodities is more senstive than weather insurance. This is

because weather insurance premium are calcualted on historical values while weather

derivatives use various tools such as CDD or HDD index and these indexs helps in setting the

appropriate price of the commodity suiting the weather condition. As such the risk mitiagtion

is more accurate then weather insurance.

4. In the US, the industries prefer trading in weather derivatives as these investors are more

exposed to weather sensitivity. Also these industries are located where CME is located.

5. The more sensitive the industry is exposed to weather, the more demand for weather

commodities. As seen from the analysis, the power sector is the industry most exposed to

weather patterns, heance the demand from this sector is highest and thus constitue nearly

35% share among the most traded industry in CME.

6. Location also plays a major factor on the demand as well as the trade of weather

commodities. As per CME, the American rural locations do not have CME trade office. This

is the main reason why weather derivatives has not yet achieved total dominance over

weather insurance yet in US.

7. As per CME, India has huge scope and potential for weather commodities futures. The

government regulations against futures trading with intangibe commodities is the main

barrier for the Indian Financial Market not being able to trade with weather derivatives.

8. The analysis of information from climate corp indicate that the weather insurance demand for

TWI is only among 12% of the total customers, which is way below the 50% beanchmark set

by climate crop.

38

9. The federal project to promote farmers using crop yeild insurance has been the driving factor

as to the reason for the cancellation of TWI product by Climate Crop.

10. The overall costs incurred by the US government to promote crop insurance over weather

insurace has increased by 8 times over 12 years, from $ 2.5 billion in 2000 to more than $17

billion in 2012. This is one of the main factor on why there is a shift among farmers to prefer

crop yeild insurace over TWI.

11. The main reason for the US government to promote crop yeild insurace over TWI was to

promote the farmer to produce crops with better harvesting techiques so as to help the

farmers rely less on uncertain weather conditions and help mitigate risk on crop production.

12. As per the statistics from WRMA, weather derivatives trading is a billion dollor indutry in

the US.

13. The Weather derivatives were traded at an average of $19 Billion over the years of 2003-

2010

14. The majority of the volume traded of weather derivatives comes from CME, since they are

largest institution trading with futures commodities in the world.

15. The weather derivatives market is also sensitive to market reactions as the volume traded fell

below the average value during the intial years of the financial crisis.

16. With regard to weather risk in India, it is very clear from ICICI that only a fraction of the

Indian rural population has their farmland covered with weather insurance.

17. These bleak figures is an indication that the weather insurance is only accessable to weathly

farmers and for farmers producing vital crops, such as that of orange cultivation.

39

Recommendations:

1. The weather derivatives trading should expand to trading firms outside CME so as to ensure

that the US population in rural areas also have access to weather derivatives.

2. More regulations have to be enforced by the SEC with regard to the background check of the

credit worthiness of the potential investor investing in weather derivatives so as to prevent

the shock experienced during the GFC.

3. Diversification of product away from HDD and CDD commodities must be introduced so as

to offer more options of weather based futres contracts to the investors.

4. The FMC should request SEBI to allow commodities trading with intangible assets so as to

open the weather commodities market to Indian Investors.

5. CME should conduct seminars and conduct training courses in India to teach Indian investors

about weather derivatives.

6. The FMC must promote the awareness on the usefulness and the potential of weather

derivatives in India by allowing more commodties trading firms to establish operations in

India.

7. The SEBI must focus more on the R&D of commodities trading in India so as to enhnce the

te process of introducing weather based commodities trading in the Indian Financial Markets.

8. Insurane companies in India must provide weather insurace products in such a way that it

more linked towards crop yeild production rather than being totally dependent of weather

conditions.

9. Government insurance companies must promote weather insurace so as to make it more

assessable and affordable to the farmers whose production is totally dependent on weather

conditions for crop cultivation.

10. Weather insurace should also be available for protection for other industies apart from

agriculture and farmers.

40

Conclusion:

Weather derivatives and weather insurance are vital for a nation‟s economy as it protects both

industries and individuals against the risk caused by weather. When comparing with weather

commodities as well as insurance markets of USA and India, it is very clear that the US is far

ahead. This is because the main commodties trading firms such as CME are established there and

also the demand for such commodties is very stable. Still even in the US, farmers still have only

the option of weather insurace due to geographical challenges. But Even with farmers in the US

having a limited option of weather insurace for mitiagting risk, weater insurace demand has seen

a downfall due to better insurace products offered by federal government to promote farmers and

industries to reduce their dependence on weather and promote insurance products based on yeild,

which would promote better production.

In India, like the US, the uncertain climate conditions make it an attractive market for weather

commodities trading. It is more preffered since the country has a huge agraian population. But

the SEBI regulations still make weather trading an illegal activity which is the main reason as to

why weather derivatives are still not traded in the Indian commodties market.This makes weather

insurace as the only options for Indians to protect against the risk caused by weather. This is also

still limited to farmers and also to only weathly farmers since it is provided only by private

insurace companies.

Weather derivaties has come a long way, but it has only been sucessfully established only in

developed financial markets such as that of USA. Weather trading is very speculative in nature

and as such even established commodities market find it very challenging.

It can be clearly stated that in USA, weather derivatives are more preferred over weather

insurace due to more industrail investors participation in the commodtes market. But for the

Indian investors,weather insurace is the preferred option to mitigate weather risk as it will take

some time for weather derivatives to be available to trade in the Indian commodties market. But

the government still has to make the option of weather insurace become assessable for industries

and not just to farmers. And in the near future, with proper research and investor

awareness,weather derivatives trading can become a reality in the India,which will enable them

to compete with the US in the futures commodities market and also in insuracne.

BIBLIOGRAPHY

41

Bibliography

Research Journals:

AFMS. (2014). Weather Risk Management.

Association, W. R. (2010). Annual Report. Weather Risk Management Association.

Barnett, D. V. (2004). Efficiency of Weather Derivatives as Primary Crop Insurance Instruments.

Considine, G. (2014). Introduction to Weather Derivatives.

Paul, J. (2013). A Study on Feasibility of Weather Derivatives in India.

Mathews, J. S. (2009). Degree days and Dog Days.

Websities:

Gandal, S. (2014, January 3). News . Retrieved January 6, 2015, from Fortune:

http://fortune.com/2014/01/03/how-wall-street-got-snowed-on-weather-derivatives/

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false

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www.cmegroup.com/trading/weather/

Weather Derivatives. (n.d.). Retrieved from Wikipedia:

www.wikipedia.org/weatherderivatives

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www.wikipedia.org/weatherinsurance

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