In 1997, the first weather derivative was created in the US. Weather derivatives are simply financial instruments used to control unanticipated (adverse) weather conditions (such as hurricanes, unusual temperatures, and snowfall). One problem with such financial products is that they are difficult to price because the underlying asset, the weather, is intangible and nontradable. Now answer the questions below. (For more details on weather derivatives, you may visit CME Group’s website, www.cmegroup.org.)

a. Who would buy a weather derivative and why?

b. How can an investor benefit from such instruments?

c. How important is an accurate weather forecast? 44