Company C is a municipality located in the state of Massachusetts, not far from Boston. Although it has reserves to deal with snow removal costs its finances are put under strain during very snowy winters.
- Option Type: Call Option
- Reference Weather Station: Boston Logan International Airport (WMO #72509)
- Risk Period: From 15 November until 15 March
- Weather Index: Total accumulation of daily snowfall (in inches) at the Reference Weather Station during the Risk Period
- Data Provider: The National Climatic Data Center (NCDC)
- Strike: 50 inches
- Tick: $20,000 per inch ($2,000 per 0.1 inch) above the Strike
- Maximum Payout: $400,000
- Settlement Amount:
- if Weather Index > = Strike then Company C 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 would cover company C against winters (15 Nov-15 Mar) with more than 50 inches of snowfall in Boston.
For example if the total accumulated daily snowfall during the Risk Period is 57.3 inches then Company C would receive: (57.3 – 50) x 20,000 = $146,000.
The payment, if there is any, normally occurs 5 business days after the end of the Risk Period (subject to data availability).