Weather derivatives
Produced in partnership with Joanna Perkins of Financial Markets Law Committee
Weather derivatives

The following Banking & Finance practice note produced in partnership with Joanna Perkins of Financial Markets Law Committee provides comprehensive and up to date legal information covering:

  • Weather derivatives
  • What are weather derivatives?
  • Uses and users of weather derivatives
  • History and popularity of weather derivatives
  • Transaction structures and documentation
  • Regulation of weather derivatives and market abuse
  • Re-characterisation risk

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marks the end of the Brexit transition/implementation period entered into following the UK’s withdrawal from the EU. At this point in time (referred to in UK law as ‘IP completion day’), key transitional arrangements come to an end and significant changes begin to take effect across the UK’s legal regime. This document contains guidance on subjects impacted by these changes. Before continuing your research, see Practice Note: What does IP completion day mean for derivatives lawyers?

What are weather derivatives?

The weather risk market is designed to assist users in managing the adverse financial impact of weather through risk transfer instruments based on weather variables (chiefly temperature, rain, snow, wind and sunshine). Solutions to the problem of weather-related financial risk will normally take one of two principal forms: catastrophe insurance or weather derivatives.

While catastrophe insurance is suitable for addressing low probability weather risks with a high potential impact, such as severe drought or flooding, weather derivatives are better suited to low impact/high probability events such as an unseasonably cool August or an unusually wet May Bank Holiday. One of the advantages of standardised weather derivatives for low impact events is that pay-out will occur automatically once the index sinks or rises past a certain point. In contrast, to recover under an insurance policy, the holder must file

Popular documents