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Derivatives

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  • August 9, 2020
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Weather Swap

A weather derivative that involves a nonfinancial or nonphysical asset, literally a weather index, and whereby one counterparty is committed to make payment to the other if the number of degree days over a pre-determined period exceeds a preset level, while the other will be required to make payment if the number of degree days is below that level. Weather swaps, thus, allow weather-affected companies and utilities to hedge risks associated with heating or cooling expenses or other business risks related to temperature or weather volatility.

This swap is also known as a temperature swap.


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