RMS offers indexes for structuring weather derivatives

Risk Management Solutions (RMS), a California-based weather risk software and data firm, has started publishing regional weather indexes for the US on its website, www.climetrix.com. The indexes provide the weather derivatives market with a new benchmark to track seasonal weather conditions relative to historical averages for 10 regions of the US. Index values are updated daily with cleaned temperature data in conjunction with RMS's partner, Maryland-based weather forecasting firm Earth Satellite Corporation.

The indexes track seasonal temperatures in both degree days and cumulative averages for each region throughout the main winter and summer trading periods. Historical averages and index values from past years are also posted for comparison.

With index values derived from a basket of 10 weather stations in each region, RMS claims that the indexes eliminate almost all of the exposure to weather station movements or instrumentation changes that is a common risk in single-station transactions.

Steve Jewson, director of business development for RMS in London, said that the indexes could encourage weather derivatives traders to trade speculatively on a group of weather stations. Energy companies that have exposures across a state or region, could also benefit from trading on the average on a block of weather stations.

Jewson added that RMS has just finished updating its German and Dutch weather data sets and that Italian data will be made available to weather risk traders, for the first time, toward the end of this week.