Weather risk: gauging the exposure

There is now an array of instruments available to hedge weather exposure, but evaluating that exposure is far harder than quantifying standard exposures such as commodity price risk. Garth Renne and Shaun Hatch discuss approaches to analysing wind and temperature effects in order to choose the correct hedging instruments

Utilities have been grappling with the effect of weather on their operations for decades. The expansion and growing maturity of the weather derivatives market now affords these companies an unprecedented ability to hedge exposures that hitherto were effectively unmanageable.

Meanwhile, the increasing prevalence of wind power has added a whole new dimension to the problem, making the management of