Weather may be a source of risk for several industries. Take, for example, the case of an energy utility. The demand for power is directled related to temperature going up in summer or going down in winter for temperature control. If, therefore, you have an unusually cool summer, the demand for power will be much lesser than anticipated, and same in case of an unusually warm winter. Several electricity utilities enter into power purchase agreements based on anticipated demand, and would face serious financial losses in such cases.
Weather derivatives provide such companies an option to hedge against risk of weather fluctuations.
The first case of securitization of weather derivatives was Koch Industries in the USA, reported on this site - click here to see this news item . Later, we have discussed the development of weather bonds market in USA as well as in Europe - click here . No permission is required for linking to any of the materials on this site.