Heineken seeks rainy day hedge

Utility companies presently dominate the market for weather derivatives, and most standard weather contracts are structured with temperature triggers – either heating degree days or cooling degree days. Precipitation-based contracts are more unusual, being used primarily by hydro-electric power companies. But Heineken is seeking to buy a precipitation-based contract that just covers Saturdays. The geographical location of the company's desired weather hedge is not known at this stage.

According to a market participant, who declined to be named, the success of Heineken’s highly specific and individual contract will be a key test for the development of weather derivatives. “The news that Heineken is looking to hedge its weather risk is encouraging,” said the source. “But the problem is that there is no company that would be a natural source for the other side of this type of contract. Who benefits from rainy Saturdays?”

According to the source, this may limit the potential growth of business, as traders would not merely be acting as market intermediaries, but could be acting more like an insurance firm.

“If the use of weather derivatives is truly going to grow, then this sort of weather risk contract is going to have to be successful,” said the source.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Calibrating interest rate curves for a new era

Dmitry Pugachevsky, director of research at Quantifi, explores why building an accurate and robust interest rate curve has considerable implications for a broad range of financial operations – from setting benchmark rates to managing risk – and hinges on…

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here