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.

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• Risk management