SMBC launches summer weather derivatives

The first contract was done for companies based in Tokyo, but the bank is also targeting companies in the rest of Japan.

The idea is for SMBC to work as intermediary between companies subject to lower profits if summer temperatures are unseasonably high, such as hot noodle soup manufacturers, and companies whose profits drop if temperatures are unseasonably low, such as beer companies and electricity companies, SMBC official Takashi Morita explained.

“We have categorised the weather risk and calculated (potential) losses” in specific risk events to determine the average temperature range and the compensation that one counterparty would have to pay the other, he said. Temperature ranges are calculated on data going back to 1961.

For instance, on one of the contracts, SMBC and the two counterparties agreed that the average temperature range in Tokyo between July 20 and August 31 is between 26 and 28.1 degrees Celsius.

If the temperature drops below 26 degrees, the company that makes more profits in cool summers will compensate the company that makes losses when the temperature is unseasonably cool. Similarly, if the temperature rises above 28.1 degrees, the company that gets more business during hot summers will compensate the one whose activity slows down during hot summers.

Each contract is custom-made, with temperatures and nominal amounts varying from contract to contract. SMBC’s fee also varies according to the level of risk, such as how wide the temperature range is.

So far, all companies that have shown interest in the summer weather risk protection are domestic Japanese companies, but Morita noted that SMBC is hoping to attract international companies operating in Japan.

SMBC is also planning to provide the same type of protection for winter weather and the bank plans to “promote it this coming winter,” Morita said.

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