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Financial terms in "Statistics and Risk Management"

1. catastrophe future

2. Skewness

3. Ranking

4. moral hazard

5. Reinvestment risk

6. regression analysis

7. Money

8. business risk

9. Risk factor

10. gearing

11. go-go fund

12. dispersion

13. factor

14. Counterparty risk

15. Macaulay duration

16. collar

17. Survey

18. Phillips Curve

19. mode

20. Discrete variable

21. hedge fund

22. Measurement error

23. risk manager

24. risk analysis

25. hurricane bond

26. Risk premium

27. Regulatory pricing risk

28. Simple moving average

29. Risk-free return

30. Trendline

31. credit control

32. Lombard loan

33. unlimited risk

34. Equity swap

35. Transaction exposure

36. credit derivative

37. credit spread

38. Probability distribution

39. Weighting

40. CBO

41. Horizontal spread

42. Federal National Mortgage Association

43. Compound option

44. correlation coefficient

45. arithmetic mean

46. covariance

47. ERM

48. stratified sampling

49. risk-weighted asset

50. Indicator

51. Financial pyramid

52. Random walk

53. variation margin

54. Average

55. forecast

56. credit default swap

57. trend

58. Entropy

59. call risk

60. secular trend

61. liquidity risk

62. interpolation

63. risk aversion

64. ladder option

65. financial risk

66. average option

67. quartile

68. internal audit

69. probability

70. operational risk

71. Herstatt risk

72. Endogenous variable

73. currency risk

74. write

75. kitchen sink bond

76. Exchange rate risk

77. normal distribution

78. Range

79. weighted average

80. Mean

81. Collateralized Bond Obligation

82. Exogenous variable

83. standard deviation

84. IP-backed

85. Dependent variable

86. Mean reversion

87. High-yield bond

88. Default risk

89. serial correlation

90. Underwrite

91. bias

92. risk capital

93. Forward Rate Agreement

94. Risk arbitrage

95. VaR

96. high yield

97. market risk premium

98. population

99. Independent variable

100. Correlation

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Featured term of the day

Definition / Meaning of

Weather Derivative

Categories: Options,

A weather derivative is a futures contract - or options on that futures contract - where the underlying commodity is a weather index.These derivatives work much the same way that interest-rate or stock index futures and options do, by creating a tradable commodity out of something that is relatively intangible. Analysts look at historical weather patterns - temperature, rainfall and other things - develop averages, and quantify the risk that weather will deviate from the average. Corporations use weather derivatives to hedge their risk that bad weather will cause a financial loss. For a cereal company, bad weather might be a drought, which would cause wheat prices to go up. For a home heating company, it could be warm days in November, which could lower demand for home heating oil. And for an amusement park it could be rain.The cereal company and the amusement park might buy futures contracts with an underlying weather index based on rainfall. The home heating company might want contracts based on a temperature index.Weather derivatives are different from insurance, because they're linked to common weather events, like dry seasons, or a warm autumn, that affect particular businesses. Insurance is still required to protect against major weather events, like tornadoes, hurricanes, and floods.You can buy weather derivatives as an individual, but you'll want to consider the trading costs carefully to ensure that your risk of loss is worth the expense.

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