weather derivative

Definition

A financial instrument used by companies to reduce the risk associated with adverse or unexpected weather. The seller of the derivative accepts the risk by charging a premium to the buyer: if nothing happens, the seller makes a profit, but if the weather turns bad, the company claims the money. Unlike insurance, weather derivatives cover high-probability events.

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Related Terms

derivative, catastrophe bond, catastrophic coverage

'weather derivative ' appears in the definitions of these terms on BusinessDictionary.com




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