How derivatives work Weather derivatives are bought or sold. The buyer wants to reduce risk from extreme weather conditions by transferring some of the risk to the seller. Takes premium from buyer in exchange for assuming risk. Pays the insured amount. Derivative does not pay off.
Premium paid by buyer becomes profit.
Weathermoney will pay Regional Gas only if heating degree-days measured at Regional Gas' local weather station exceed mutually agreed parameters from September through March. In the case of a mild winter, heating-degree days cannot exceed a certain value. Buyers and sellers of weather derivatives need a long, continuous record of weather observations to set index thresholds. Private contracts, similar to the one between Regional Gas and Weathermoney, are often written for specialized weather events. Among the most common are derivatives that involve the amount of snow or rain, the number of days the temperature falls below freezing or rises above 100 degrees, says Ryan Ricker, a weather trader with Kansas City-based Aquilea Energy.