Weatherproofing the VAR

The weather derivatives market shares some similarities with other markets, but applying existing models can sometimes have disastrous results. Brett Humphreys and Eric Raleigh discuss how weather derivatives differ from financial derivatives and how we can use information from weather forecasts to measure risk

Joe Risk Manager has a new challenge. The risk management committee at his company has given approval for the trading group to trade derivatives based on temperature. Now a trader has entered into a set of weather trades, and Joe has to report the risk associated with the weather book by Monday. While this seemed simple when he first said he could do it, he is finding that successful implementation is another thing altogether.

The attributes of markets
The challenge facing Joe is a common one