How significant of risk is the weather to companies? Explain and provide some references.\ List three industries that are significantly impacted by the weather.\ Define a weather derivative. How can weather derivatives mitigate risk for companies in the three industries you stated above?\ Explain HDD and CDD calculations.\ Assume that in the fall of 2023, SecondEnergy forecasts purchased power revenue of $750 million for the Cleveland, Ohio area for the winter of 2024. This is based on a projection of selling consumers 10 billion kilowatt hours at $.075/Kilowatt hour and an average temperature of 37 degrees for the months of December, January, and February. \ SecondEnergy determines that its sales are positively correlated with the HDD Index with a sensitivity ratio of 0.70 (i.e., a 1 percent change in HDD is expected to drive a 0.70 percent change in SecondEnergys revenues). \ \ A financial institution offers the following weather derivative to SecondEnergy. For the three-month period December through February, an HDD Index derivative has a basis of 2,520 HDD. The HDD accumulation is determined from the average temperature in Cleveland being 37 degrees for that 90-day period (December-February). Specifically, the accumulate HDD = ((65 - 37)*90 days). The derivative instrument sells for $50,000 and will pay out $2,050 for every HDD below the basis 2,520 after the 90-day period. Therefore, if the average temperature in Cleveland was 38 degrees over the 3-month period, the derivative will pay out $184,500. This is determined by taking the HDD difference of the basis (2,520) and actual ((65-38)*90 days = 2,430) times $2,050 (90 * $2,050 = $184,500). The derivative pays 0 if the actual HDD is equal to or greater than the basis of 2,520 (i.e., the average temperature is equal to or below 37 degrees). \ \ SecondEnergy is concerned about an unusually warm winter in Cleveland, Ohio. They decide to purchase 100 of the weather derivatives described above for a total of $5 million. Please determine the following amounts assuming the average temperatures were 31 degrees, 34 degrees, 37 degree, 40 degrees, and 43 degrees. \ \ Actual Temp Loss/Gain in Revenue Derivative payout Cost of Derivative Net Gain/Loss\ \ 31 degrees $5 million\ \ 34 degrees 5 million\ \ 37 degrees 5 million\ \ 40 degrees 5 million\ \ 43 degrees 5 million