Weather derivatives

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weather derivatives

Business contracts, established betwen two firms to provide financial coverage for specific weather risks, that serve as a form of hedging against potential losses.

The weather risk is the uncertainity in cash flow and earnings due to weather variability. Risks typically covered for a firm in the energy industry are the number of heating or cooling degree- days, and for agribusinesses, the amount of growing season rainfall or the number of July days with temperatures above 32°C (90°F).

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