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Russell Andersson, HedgeStreet's vice president of instrument origination and a co-founder of the exchange, said other weather-related contracts in the future could be tied to rising ocean levels.
"The risk has to be able to be measured in an index for a derivative product to become a candidate," Andersson said. An example would be precipitation or temperature.
Yet the real challenge is not in designing and listing a contract but in creating opportunities to trade the products, he said, because it normally takes some time to develop an even, two-sided order flow.
"You have natural hedges looking to buy insurance against the risk, but (the demand) doesn't correspond with speculators willing to take the other side of a trade," Andersson said. "We listed our hurricane contracts knowing the big reinsurance companies wouldn't be trading them on Day One."
Instead, HedgeStreet's strategy is to nurture the market and generate a retail community of traders to validate the concept. And with more exchanges going public and competition heating up, they're getting more aggressive in listing new products as institutional investors look to hedge weather risk.
"Some products to think about would be contracts based on sea levels, or the effect of global warming on commodities such as the cost of fish or agricultural goods," said Andersson.
Targeting small businesses
A start-up company founded by a former Google (GOOG, news, msgs) executive is trying to develop a market that would allow small businesses such as golf courses to insure against weather-related losses associated with rain or temperatures.Online service WeatherBill allows businesses and speculators to buy contracts that compensate the holders when adverse weather conditions ensue, and it's not limited to major events such as hurricanes or floods.
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"We're basically selling call options on underlying weather indices," said David Friedberg, WeatherBill's chief executive, who was a product manager on the advertising side at Google. "We want to make these contracts accessible to all businesses because everyone is affected by the weather to some extent."
As climate change attracts bigger headlines and increased attention, weather is seen as growing more uncertain and variable, he added.
For example, golf courses lose business on rainy days, while ski resorts see their bottom lines hit by unseasonably warm winters. The contracts are tailored to meet a business's particular needs and based on temperature and precipitation levels, and they can range in duration from one day to six months.
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One example would be a golf course purchasing a contract to be compensated based on the total number of rainy days over a given period. A golf club in Louisville, Ky., for instance, could buy a contract to be paid $2,000 every day it rains at least half an inch during the peak season.
Friedberg declined to discuss WeatherBill's clientele or financials.
In late March, the San Francisco company said it had reached an agreement with Nimbus Weather Fund, managed by Nephila Capital, an investment manager specializing in reinsurance. Nephila provides the risk capacity and collateral to cover the weather contracts sold by WeatherBill, according to the company.
WeatherBill, which counts New Enterprise Associates and Index Ventures among its investors, has estimated that the operations of 70% of U.S. businesses are significantly affected by weather.
This article was reported and written by John Spence for MarketWatch.
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