Weather Derivatives
Weather derivates protect against the financial consequences of adverse weather and climate risks with innovative weather risk transfer solutions.
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Over two-thirds of the world's economy is impacted by meteorological conditions. As climate change progresses, unpredictable weather events, such as exceptionally mild winters, cool summers, and periods of sustained high or low wind, are becoming more frequent.
Munich Re develops bespoke risk transfer solutions for all industry sectors impacted by non-catastrophic weather variability. Companies can reduce their financial exposure to the effects of adverse weather and climate events with customized weather derivatives.
Innovative weather coverage – what's in it for you?
Parametric weather products explained
Parametric weather products provide financial security for businesses that rely on stable weather conditions. These market-based solutions compensate weather-related losses of the counterparty if realized weather falls outside an established range. The operative weather index can be based on variables such as temperature, wind speed, precipitation, or irradiation.
These products in the form of derivative contracts benefit companies operating in commodity-linked businesses can additionally protect against the contingent variability of commodity prices with our tailored dual-trigger solutions combining weather and contingency prices structures.
What is a weather derivative contract?
- A weather derivative contract will be triggered if both the realized weather and the price of a related commodity fall outside an established range.
- A risk transfer solution designed to absorb the exact portion of exposure, leaving a residual risk that is commensurate with risk tolerance with strikes at or away from the mean.
- Structured as a contract of differences (mathematical objectivity), not an indemnity contract. Choose from a wide variety of available structures - Swaps, Calls, Puts, Collars, Baskets, etc.
North America and Europe
Asia
Asia
Australia
Europe
Weather Risk Management
Weather Risk Management
Weather Risk
Management
Weather Risk
Management
Weather Risk Transfer Solutions
Temperature risk mitigation products are primarily used to mitigate the revenue variability based on temperatures, electricity or gas market prices. These products are strongly connected to the energy industry.
Pure volumetric risk products are based on temperature and are focused as well on other industries such as agriculture, tourism and leisure or mining and construction.
When combining volumetric and price risks, we offer three main categories of coverage options:
- Temperature Contingent Variable Call Options, combining temperature and price. We develop indices based on average, maximum, and minimum temperatures.
- Call-Call Options to cover cold weather (winter)/warm weather (summer) and high commodity price scenarios or warm weather (winter)/cold weather (summer) and low commodity price scenarios.
- Slice of system structures based on a fixed for floating load swap on a percentage load of the system.
Wind risk mitigation products are primarily used to eliminate pure volumetric risk and to mitigate the revenue variability based on both volumetric and price risks. They have multiple applications for energy producers, construction, infrastructure, and transportation companies.
For power generation, our focus is to mitigate the variability in the average wind speed leading to loss of energy generation and revenues.
The main structures are:
- Swaps where the variable volume/revenue is exchanged for a fixed volume/revenue.
- Floors to guarantee a specific volume or revenue over time in exchange for an upfront premium.
- Collars where the wind farm funds part of the premium required to guarantee the floor by selling some of the upside.
For other industries or for construction activities, the focus is on the coverage of high wind speeds that could cause delays or business interruption.
Our solar solutions are primarily intended for the power generation industry, like solar farm owners and utilities. The focus is to mitigate the variability in the average solar irradiation leading to loss generation and revenues.
The main structures are:
- Swaps where the variable volume/revenue is exchanged for a fixed volume/revenue.
- Floors to guarantee a specific volume or revenue over time in exchange for an upfront premium.
- Collars where the wind farm funds part of the premium required to guarantee the floor by selling some of the upside.
Hydroelectric generation depends mainly on the amounts of water that is turbinated, which is driven by inflow, changes in reservoir levels and spillage. In some countries, hydrological river data is publicly available and can be used to hedge the production risk. In certain countries where public data is not available, precipitation data is used instead to replicate the hydro production.
The main structures are:
- Swaps where the variable volume/revenue is exchanged for a fixed volume/revenue.
- Floors to guarantee a specific volume or revenue over time in exchange for an upfront premium.
- Collars where the customers funds part of the premium required to guarantee the floor by selling some of the upside.
Munich Re builds an index that mirrors the gross profit generated by hydro power plant. We can consider all existing bilateral power purchasing contracts as well as reliability contracts.
Design your own protection and transfer your business risk
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