Hedging Weather Risk through Weather Derivatives: An Indian Perspective

‘The growth in the customized weather derivatives market shows increasing participation from a wide variety of end users who recognize the value of actively managing their weather risk.’

Bill Windle, President, Weather Risk Management Association.

In the twenty-first century, global warming has emerged as a great threat to human civilisation. Melting of the Arctic at an alarming speed, rising sea levels, shrinking of the cryosphere and death of polar bears are serious indications of global climatic changes. The uncertainty in weather conditions has given birth to a new kind of so-called weather risk. A weather derivative is the latest weather risk management tool that enables companies to manage weather-related exposures and protect against abnormal weather conditions. This article is a theoretical study of the uses of weather derivatives in hedging weather-related risks arising out of different weather conditions, such as temperature, snowfall, precipitation, etc. It also studies the possibility of the use of weather derivatives in the Indian market to promote agricultural risk transfer.