An introduction to weather and climate derivatives

Since the early 1980s, derivatives have been used by companies to manage their exposure to risk, be it due to currency exchanges or a host of other financial uncertainties. The financial derivatives markets are by far the biggest trading markets in the world, and derivatives are the most widely used and understood tool for risk-management purposes. They are also extremely cost-effective compared to more traditional insurance policies. A derivative can be defined as a contract between two parties that defines how payments will be made between them at the end of a contract period according to an agreed outcome.