Don began his presentation with a very humorous video on how seriously Torontonians take the weather.   Once he had our attention he began to tell us how the weather can impact our local economy and how specific industries can use weather derivatives to protect themselves from environmental events. Weather derivatives are financial securities such as swaps, forward contracts or options contingent on weather related variables. 15 % of our industrial economy is weather sensitive. Don demonstrated how others such as tourism driven cafes or hair salons in Georgia can be affected by weather.

 

In order for a derivative to be sold one needs to decise on the weather variable at risk, there must be sufficient data from a historical perspective from reliable weather stations, dollar values at risk must be set and strike values at which the "bet" pays off must be set. Don used a chart of cummulative icewine hours to illustrate how this would work in reality.  An article in the Globe and Mail this January also discussed this new approach to risk protection. open the link below for the full story.

 

Weather derivatives are officially traded on the Chicago Mercantile Exchange as well as "Over the Counter" by other financial institutions. Dr. Cyr deals with the latter.  He stressed that they are not insurance contract against total loss but are designed as bets on the weather conditions that offset risk.

 

He gave us examples of past major events such as the snowfall of 1977, the extreme cold of 1981 or the El Nino of 1998 , but added that there are many more lesser but serious variations in between that drastically affect crop levels and quality. He also gave us other local examples of insutry or activity that are looking at derivate protection. Snow removal in the City of St. Catharines or Social services in the Niagara region are two diverse activities that could benefit from a weather derivative. The implications to food bank or shelter costs in the event of extreme cold are huge.

 

Don concluded with some comments on the effect of Global Warming as it increases the volatility in weather and therefore the risk in various economic activity.

 

http://www.theglobeandmail.com/servlet/story/RTGAM.20080109.wldecanter09/BNStory/lifeFoodWine/Ontario/