Questions regarding weather Risk, breakeven exchange rate, Essay

Questions regarding stand Risk, breakeven exchange rate, - Essay ExampleIn fact, this sort of trading would be comparable to trading the varying values of stock indices, currencies, interest rates and agricultural commodities.However, the inception of theweather derivatives has made weather a tradeable commodity (Stephen Jewson, Anders Brix and Christine Zeihmann, 2005). Weather derivatives are financial instruments that can be utilize by individuals or organizations as component of a take a chance management strategy to decrease the jeopardize associated with adverse and unexpected weather conditions1. It is different from the crop insurance policy that is generally use for high risk coverage. The weather derivatives are mainly used for low risk events. Until recently, insurance has been the main tool used by companies for protection against unexpected weather conditions. But insurance provides protection only against catastrophic damage. indemnification does nothing to prote ct against the reduced demand that businesses experience as a result of weather that is warm or colder than expected. Farmers can use weather derivatives to hedge against poor harvests caused by drought or hoar theme parks may want to insure against rainy weekends during peak summer seasons. Hence the chief operating officer of ADLA must use weather derivatives.For example, a company might use a weather derivative to hedge against a frost ans heavy wind velocity (a low-risk, high-probability event). In this case, the company knows its revenues would be affected by that kind of weather. But the same company would most likely purchase an insurance policy for protection against damages caused by a flood or hurricane (high-risk, low-probability events).In contrast to the sundry(a) outlooks provided by government and independent forecasts, weather derivatives trading will give this company (ADLA) a quantitative view of those outlooks and hence protects the interests of the company ag ainst adverse weather elements.Over the counter trading weather derivatives are privately