Wednesday, January 28, 2015

No Snow, No Problem: How Wall Street Profits from Weird Weather


Never discount Wall Street’s ability to turn the most basic parts of life into profits. Mother nature is the latest money spinner for financial firms. Despite the recent Northeast snowstorm, the unseasonably warm winter, and in general a lack of snow, could turn into big profits for the banks, brokerages and insurance firms that deal in so-called weather derivatives.

Financial contracts based on the weather have been around since at least the late 1990s. The contracts, many of which trade like stocks, are typically pegged to such things as rainfall and temperatures. But in the past few years, contracts specifically tied to snowfall have started to take off in popularity. The contacts essentially act like insurance, allowing, say, retailers or ski mountains to insure against too much snow or too little. Wall Street sells the contracts, matching buyers and sellers and pocketing a small commission. Typically, it’s a good business, but this year it could be a real moneymaker.

In theory, there could be as many firms betting against snow as for it. But in reality the market is always lopsided. It turns out there are more firms that are hurt by large snowfalls than the opposite. And large ski mountains have yet to get into the market. Vail Resorts, for instance, a public company that owns its namesake mountain as well as a number of others, says it doesn’t use weather derivatives to mitigate losses when snow is light. Jeff Hodgson, who runs the Chicago Weather Brokerage and specializes in snow derivatives, says he has yet to work with a ski mountain. What’s more, last year’s record snowfall caused more companies than ever to seek protection this winter.

For the rest of the story: http://business.time.com/2012/01/24/no-snow-no-problem-how-wall-street-profits-from-weird-weather/

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