A Major Threat Of An Economy Comes From Climate Change

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A major threat in an economy comes from climate change. Excessive rain or warmer than expected winters, increase the risk for a lot of companies, mainly in the solar and energy sector, and ultimately affects their revenues. As the wind and solar industry continues to grow, investors are injecting more capital in order to organize this industry by way of decreasing the risks inherent to it. Accordingly, and as more money is invested in these markets, more investors and stakeholders are looking for better risk management techniques that could protect their assets and ensure a steady flow in revenue.

Derivatives are financial instruments used to transfer the risk associated with the variation in the underlying asset to a third party inclined at accepting that risk, but in exchange for a premium ; thus, the payoff from derivatives depends on the value of this underlying asset. Consequently, the protection or insurance paid from a certain derivative depends on the level of an index, as opposed to traditional insurance that depends on real losses.

A unique type of derivatives is “Weather Derivatives” that identify their payouts based on certain weather conditions that unfavorably affect the revenues of a business. Weather derivatives, unlike conventional derivatives that are based on tradable assets such as stocks, bonds, currencies, etc., have “weather” as the underlying variable that is considered as non-negotiable; implying that the aim of weather derivatives is to manage
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