Company A is a theme park operator and its revenues are badly affected when rainy week-ends occur during the summer months (the peak season for theme parks).
The company operates several theme parks in the west of London (UK) and is contemplating a purchase of the following weather derivative.
- Option Type: Call Option
- Reference Weather Station: London Heathrow Airport, UK (WMO #3772)
- Risk Period: From 1 June until 30 September, Saturdays and Sundays only
- Weather Index: Total number of Rainy Days at the Reference Weather Station during the Risk Period
- Rainy Day: A day with more than 3mm of rainfall, as recorded by the Data Provider
- Data Provider: The UK Met-Office
- Strike: 2 Rainy Days
- Tick: £100,000 per Rainy Day above the Strike
- Maximum Payout: £1,000,000
- Settlement Amount:
- if Weather Index > = Strike then Company A receives (Weather Index – Strike) x Tick
- if Weather Index < Strike there is no Payout
- All payments are subject to the Maximum Payout
This Weather Derivative covers Company A against any Saturday or Sunday (in excess of 2) where the daily rainfall measured at London Heathrow is greater than 3mm.
For example if there are a total of 7 Rainy Days in the Risk Period Company A would receive: (7-2) x 100,000 = £500,000.
The payment, if there is any, normally occurs 5 business days after the end of the Risk Period (subject to data availability).