WO2008124598A1

WO2008124598A1 - Weather risk management

Info

Publication number: WO2008124598A1
Application number: PCT/US2008/059418
Authority: WO
Inventors: Jordan Rizzuto; David Riker; Dennis Reaves
Original assignee: Storm Exchange, Inc.
Priority date: 2007-04-04
Filing date: 2008-04-04
Publication date: 2008-10-16

Abstract

A system and method are provided for automatically determining a user's business sensitivity to one or more weather events, correlating such sensitivity to one or more weather based financial indexes, creating a new specific index based on such weather sensitivity, generating a financial derivative based on the correlated or created index, executing a contract on the financial derivative, and facilitating the trade of the correlated financial derivative to a third party.

Description

Weather Risk Management

CLAIM OF PRIORITY

This application claims the benefit of priority and is related to U.S. Provisional Application No. 60/922,066, filed April 4, 2007, which is incorporated herein by reference in its entirety.

TECHNICAL FIELD

This disclosure relates to a network for identifying and analyzing business sensitivity to weather and a system to price and execute a weather-indexed derivative.

BACKGROUND

Weather challenges a wide spectrum of businesses. Energy, agriculture, transportation, construction, municipalities, school districts, travel, food processors, retail sales and real estate are examples of industries whose operations and profits are sensitive to weather events. For example, unreasonably mild winters diminish consumer demand for heating and erode the margins of utility companies. Adverse financial conditions result from unplanned weather events. The weather risk market makes it possible to manage the financial impact of weather through risk transfer instruments based on a defined weather element, such as temperature, rain, snow, wind, etc. If these weather elements are not planned, they may affect revenues, costs or margins. Weather risk management in its simplest form involves the payment of a premium by an entity sensitive to a weather event to a risk taker who assumes the risk posed by the adverse weather. In exchange for the premium, the risk taker, under certain pre-defined circumstances, will pay the buyer an amount of money which corresponds to the loss caused by the weather event.

Unforeseen weather events may lead to adverse financial conditions, which can be managed either through traditional insurance contracts or by financial instruments built around the weather element to which the buyer is exposed. Insurance is a heavily regulated industry with specific requirements and qualification criteria. Additionally, actual loss must typically be shown before payment. Erosion of margin or exceeded budgets, for example, often do not qualify for insurance payment. Financial instruments such as derivative transactions provide more flexible and customized risk management opportunities than insurance contracts. A wide range of capital providers make markets in weather risk. To date the weather risk management trading market is primarily comprised of dedicated weather trading operations, the trading desks of financial institutions and utilities, professional commodity traders and hedge funds. Transactions can be effected over-the-counter (OTC) or on commodity exchanges. These transactions, however, have traditionally been limited to large commercial entities with average trading sizes between approximately $2.0 million and $2.5 million, for seasonal exchange traded contracts, and up to $100 million for highly structured over-the-counter contracts, which can be multi-year agreements.

Standardized indices, which provide a benchmark on the impact of weather for a given industry, can create opportunities to overcome limitations of complex financial contracts that are restricted to a small, elite group of users. Without the use of standard language, risk metrics and indices, the small, medium and even larger sized participants — that may have a limited understanding of derivatives and or the implications of weather on their financial results — can incur an expensive sales process. Dealing effectively with such transactions requires a high level of automation and systematic means of standardizing products which otherwise would need to be tailored to the specific risk profile of each customer.

Additionally, small commercial entities have not had an efficient means to define the natural risk exposure associated with their operations or finances. Indeed, companies with limits in the tens to hundreds of thousands of dollars are not well served by existing weather derivative markets and require an efficient means of defining weather associated risk to facilitate and/or create OTC derivatives with third-party risk takers willing to assume low dollar limit contracts.

As such, a need exists for an automated system to identify an organization's natural risk exposure and the impact of that risk exposure on the financial performance of the organization. There is also a need to correlate such risk exposure with a tradable weather based derivative or index. There is also a need to match entities having natural weather exposure with market participants and risk takers willing to assume the risk exposure for a premium.

SUMMARY

The present invention includes systems and methods directed towards the need for an automated system to identify and correlate risk parameters experience by a small, medium or large commercial entities with a tradable weather based derivative or index and facilitating the execution and trade of a derivative contract. The exemplary implementations of the invention provide for a system and method for analyzing weather related risk exposure, matching that risk exposure to a weather based financial index, facilitating the purchase of the index, and facilitating the transfer of the index to a risk taker. Should no correlation be found between a given risk exposure, a new and unique weather index may be created to match the risk exposure and facilitate the sale and transfer of the index. Additionally, systems and methods are provided for determining the weather sensitivity or risk exposure due to weather of a business or business unit, product line, or area of operation. The identified weather sensitivity forms the basis for a consumer or user rebate program based on the occurrence of a specified weather event. These general and specific aspects may be implemented using a system, a computer-implemented method, or a computer program, or any combination of systems, computer-implemented methods, and computer programs. In an implementation a method is provided for executing a financial derivative the method comprises: assessing a customized risk sensitivity profile attributable to one or more weather events; correlating the risk sensitivity to one or more financial indexes; creating a financial derivative based on the one or more financial indexes; and executing a financial derivative between two parties. The risk sensitivity profile can be customized based on user specific criteria. Additionally multiple financial indexes can be prioritized during the correlation of the risk sensitivity to the financial indexes. The financial indexes can be chosen from a pre-existing list of weather based financial indexes. The financial indexes can be newly generated to match the risk sensitivity profile.

In another implementation a computer readable medium is provided, wherein the computer readable medium has stored thereon a computer program that, when executed, causes a computer to perform the steps of: displaying one or more weather based financial indexes; performing a weather sensitivity analysis to produce a weather sensitivity profile; correlating the weather sensitivity profile with the one or more weather based financial indexes; generating a financial derivative based on the correlated weather based index. The financial indexes can be chosen from a list of pre-existing indexes. A new weather based financial index can be generated based on the weather sensitivity profile. The new weather based financial index can be displayed with weather based financial indexes chosen from a list of pre-existing indexes.

In a further implementation a computer readable medium is provided, wherein the computer readable medium has stored thereon a computer program that, when executed, causes a computer to perform the steps of: displaying one or more weather based financial indexes; performing a weather sensitivity analysis to produce a weather sensitivity profile; correlating the weather sensitivity profile with the one or more weather based financial indexes; and generating a financial derivative based on the correlated weather based index, wherein the step of generating a financial derivative further comprises the steps of: requesting a derivative contract based on a correlated weather based financial index; entering derivative parameters; pricing the derivative contract; submitting over a network requests for bids on the derivative contract; receiving bids for the derivative contract; and executing the priced contract. In yet another implementation a system is provided for arranging a financial contract between a first user and a second user, the system comprising : a communication network; one or more user devices connected to the communication network, the user devices including displays; one or more servers connected to the communication network and configured to present on each of the displays, via the communication network, an interactive program wherein the interactive program displays one or more weather based financial indexes and performs a weather sensitivity analysis to produce a weather sensitivity profile, then correlates the weather sensitivity profile with the one or more weather based financial indexes, and generates a financial derivative based on the correlated weather based index.

In another implementation a method is provided for utilizing weather risk sensitivity, comprising: identifying user specific business data; assessing a customized risk sensitivity profile attributable to one or more weather events; determining an optimal customer rebate based on the risk sensitivity profile, comprising; identifying threshold weather events based on historical weather data and assessing rebate participating and payout parameters; and reporting rebate program parameters, wherein the program parameters comprise a projected rebate program cost. The method can further comprise creating a financial derivative based on the one or more financial indexes; and executing a financial derivative between two parties. The method can include comparing the projected rebate program cost against the financial index projected performance. The method can include recommending a rebate program. The method can include recommending a rebate program and a financial derivative.

DESCRIPTION OF DRAWINGS

FIG. 1 is a flow chart of an implementation of the present invention; FIG. 2 depicts a system of an implementation of the present invention; FIG. 3 is a flow chart of an implementation of the present invention;

FIG. 4 is an exemplary interface of an implementation of the present invention;

FIG. 5 is a flow chart of an implementation of the present invention;

FIG. 6 is an exemplary interface of an implementation of the present invention; FIG. 7 is a flow chart of an implementation of the present invention;

FIG. 8 is a flow chart of an implementation of the present invention;

FIG. 9 is a flow chart of an implementation of the present invention;

FIG. 10 is an exemplary interface of an implementation of the present invention;

FIG. 11 is a flow chart of an implementation of the present invention; FIG. 12 is a flow chart of an implementation of the present invention; and

FIG. 13 is a flow chart of an implementation of the present invention;

DETAILED DESCRIPTION

Unforeseen weather conditions and changes in climate can have a financial impact on a business or industry. Although extreme and relatively low occurrence weather events such as hurricanes and blizzards can adversely affect a business's operations, moderate and higher probability weather conditions can also have a negative impact. For example, frost or drought may lead to reduced crop yield. In another example, extended periods of rain may result in reduced attendance for an amusement park or delayed construction schedules and therefore a decrease in revenue. Or high wind events may prevent or delay the use of a leased crane, increasing costs and adversely impacting schedules.

As such, an individual or business may seek to reduce the financial risk associated with potential weather events. To offset those weather related risks, the individual may enter into a financial contract, called a weather derivative, with a counter-party that is willing to assume the risks for a specified contract price, payable to the party assuming the risk. If a particular weather event specified by the contract occurs, the individual may be entitled to receive a payment from the counter-party which can offset losses expected as a result of the weather event. Alternatively, if the particular weather event does not occur, the counter-party makes a profit by retaining the premium paid for the contract. Accordingly, the sale of derivative contracts allows businesses to hedge against potential weather-related losses.

The value of the weather derivative, or the contract cost, may be linked to a weather index, which is a mathematical formula that combines multiple parameters describing weather events, as a benchmark for payout of the derivative contract. Weather indexes can be defined so that they are relevant to specific weather events that have a financial impact on particular industries. The weather indexes can be based on a single weather event or multiple weather events. In addition, weather indexes can be based on different geographic locations and different time periods that include, for example, days, weeks, months and seasons. Weather indexes may be based on other parameters as well.

An example of a weather index is the heating degree day index. The heating degree day index is an index which reflects the seasonal demand for energy to heat houses and businesses and corresponds to the cumulative number of degrees that each day's average temperature is below 65 ⁰F (i.e., the temperature below which a building needs to be heated) during a specified period of time. Energy producers and distributors need to make assumptions on the amount of load necessary to fulfill client demands for heating in the winter. An energy provider concerned about the stability of its profits in a specified geographic location and time period may purchase a weather derivative based on a heating degree day index. For example, if the cumulative number of degrees that each day's average temperature is below 65 ⁰F in a winter season (November 1 to March 31) falls below a predetermined mark, the energy company may receive a payment proportional to the difference, which can offset lost revenue from the reduced demand for its energy for heating. If the cumulative number of degrees that each day's average temperature is below 65 °F does not fall below the predetermined mark, no payment is received and the cost is the price of the derivative contract. Examples of other weather indexes include, without limitation: cooling degree day index, rainfall index, wind speed index and stream flow index, although additional weather indexes also exist. Weather indexes may be broadly applied across industries, as with the heating degree day index, or may be specific to a particular geographic location, industry segment, business, organization, or individual event.

In general, weather derivatives and weather indexes may involve the process of: (1) identifying the critical weather variable or variables; (2) identifying the impact of the weather variables on revenues, margins, profits, and/or costs; (3) identifying a reliable, neutral source of historical data and current recordings of the weather variables; (4) identifying the date period during which the weather variables' influence is operative; (5) quantifying the relationship between changes in the weather variables and changes in the financial parameter affected by the weather; and (6) establishing sensitivity to the changes in the financial parameter and translating the sensitivity into terms of the weather variable. In most cases, weather risk is volumetric risk, but could also be a cost based risk. For example, variation in winter temperatures are the major determining factor in variations in the volumes of gas consumed for ambient heating. Amounts of rainfall are a significant determinant of crop yield. Snowfall impacts budgets for snow removal from highways and runways. The economic limit is developed by applying costs — historical, projected or budgeted — onto the changes in volumes linked to unplanned changes in weather.

Most weather derivatives and indexes are based on three types of weather risk programs, aggregate measures of weather variables over a defined period, adverse days and adverse events. Aggregate based programs respond to the total of the values of the weather variable over a specified period, e.g. 40 inches of total snowfall in a season. Adverse day programs respond to the number of days which are characterized by the adverse condition, e.g. 10 days in the winter in which the maximum temperature is less than 15 degrees. Adverse events based programs respond to the occurrence of a weather condition, e.g. a day on which the maximum recorded windspeed exceeds 50 mph during the term of the agreement.

Because of the many variables involved in correlating a business's weather risk exposure with expected losses or costs, and then matching the exposure with an existing weather based index or creating a user-specific weather index and then writing a derivative contract specific to the natural risk involved, most weather based risk management programs have focused on large commercial endeavors. As such, small and medium sized operations facing natural weather risk have been excluded from the weather risk management market. Indeed, dealing effectively with the small limit transactions associated with small and medium commercial entities requires a high level of automation and systematic means of standardizing products such as weather based indexes which are tailored to the specific risk profile involved. Additionally, the lack of standardized weather indexes has led to a complex, often misunderstood financial market centered on weather related risk. As such, businesses lacking expertise in weather based financial products look to other sources to hedge natural risk exposure or simply assume the risk as part of ordinary business.

For these reasons, a need exists for an automated system to identify weather based risk exposure experienced by a small, medium, or large organization and correlate those natural risks with potential financial losses. Once a business's weather based risk parameters are understood, they may be correlated to a customized, over-the-counter weather derivative or a derivative based on a tradable weather index. Furthermore, there is a need to efficiently match weather based derivatives purchased to hedge small, medium, or large risk holders with commercial players willing to assume such risk, and then facilitate the execution and trade of over-the-counter weather derivative contracts. Additionally consumer facing businesses having weather based risks can entice customers and relevant consumer segments to purchase goods and services by offering a weather based rebate. FIG. 1 is a flow chart of an exemplary method to meet this need in which a user's natural risk exposure is identified and correlated with one or more weather indexes. The weather indexes are chosen from a pre-existing list of weather indexes stored in a library. Should no correlation or a weak correlation be made between a user's natural risk exposure and existing weather indexes, the user may create a new, user-specific weather index that matches the user's weather related risk exposure.

Referring to FIG. 1 , the user accesses a weather derivative program 101, and is prompted to perform a weather sensitivity analysis 103. Should the user choose to perform such a sensitivity analysis, relevant business or user specific parameters are identified 104 and the natural risk or sensitivity associated with one or more weather events are determined 106. A correlation 108 is then made between the risk or sensitivity identified in 104 and one or more existing weather indexes. Weather indexes may be stored in a database or other accessible memory. After correlating the user's natural risk with one or more weather indexes, the weather indexes and related information are displayed to the user, 105.

Referring still to FIG. 1, after accessing the weather derivative program 101, the user may choose not to perform a weather sensitivity analysis, at which point weather indexes are displayed 105 to a user based on a pre-existing or default user profile. The user is then prompted to create a user-specific weather index 107. A user may choose to create a new, user-specific weather index if no correlation or a weak correlation is made between the user's weather sensitivity and existing weather indexes in the weather index library. Should the user choose to generate a new, user-specific weather index, a new weather index is generated 110 based on user parameters, historic weather information, geographic information, time period of concern, business sensitivities and other factors. The new user-specific weather index is then displayed with other correlated indexes or indexes within the user subscription. The user can also choose to assess and evaluate consumer rebate options 109. Should the user choose to evaluate consumer rebate options, a rebate analysis 112 is performed which compares the user's risk sensitivity and business parameters with various rebate programs to determine an optimum range and cost of rebate programs based on the occurrence of one or more weather events or threshold activities. The user can compare 114 the relative costs and risk exposure associated with a derivative program and/or a rebate program. The user can then request, generate and execute a derivative contract 115 based on an index that is highly correlated to the user's natural risk exposure or to the user's financial profile. The user can also request, create and administer a consumer rebate program 117 based on rebate costs that are highly correlated to the user's weather based risk sensitivity. In an implementation, a user may perform a risk sensitivity analysis 103, and choose to generate and execute a weather derivative contract that is not based on a weather index but rather based on the user's specific natural risk exposure. In such situations, no correlation with an existing index or creation of a user specific index occurs. Derivatives based directly on a user's natural risk exposure may be suitable for low dollar limit operations, or specific risk parameters not easily correlated with a weather index.

In an implementation, a user may perform a risk sensitivity analysis 103 and evaluate 109 the feasibility of offering a consumer weather based rebate. The rebate amount and parameters are determined using data from the weather risk sensitivity analysis 103. Rebate parameters can include, for example, determination of threshold event occurrences such as days of rain in a season or cumulative snow fall; dollar value of the rebate to the consumer, total cost of the rebate program, total payout of the rebate program upon, anticipated increase in consumer or customer base resulting from offering the rebate.

FIG. 2 is a diagram illustrating an exemplary system implementing the method of FIG. 1. The system includes a server 5, a network 10, multiple user terminals 15 and provider terminals 20. Network 10 may be the Internet or any other computer network. Server 5 and provider terminals 20 may be connected together in a local area network 25. User terminals 15 and provider terminals 20 each include a computer readable medium 16, such as random access memory, coupled to a processor 17, and a user interface 18, displayed on a display 19. User terminals 15 and provider terminals 20 may also include a number of additional external or internal devices, such as, without limitation, a mouse, a CD-ROM, and a keyboard. In general, user terminals 15 and provider terminals 20 may be any type of computing platform connected to a network and that interacts with application programs, such as a personal computer, personal digital assistant, or a smart cellular telephone.

Server 5 communicates with user terminals 15 via network 10 and with the provider terminals 20 in the local area network 25. Server 5 may include a processor 6 coupled to a computer readable memory 7. Server 5 may additionally include one or more secondary storage devices 8, such as a database. Server 5, although depicted as a single computer system, may be implemented as a network of computer processors. The memory 7 includes a weather derivative program 30 and a library of weather indexes 31. The weather derivative program 30 may transmit data to and receive data from the user terminals 15 and the provider terminals 20. The data and information provided by weather derivative program 30 may be downloaded, stored and viewed using a web browsing application installed on the user terminal 15. An example of a common web-browser is Microsoft Internet Explorer, produced by Microsoft Corporation of Redmond, Washington. Other web-browsers or applications for downloading, storing and viewing information over a network such as the Internet may be used as well.

The weather derivative program 30 in the example of FIG. 2 hosts a website which can be used for identifying an organization's weather based risk exposure and viewing and creating weather indexes. Weather derivative program 30 can also be used to purchase and trade weather derivatives based on the weather indexes included in weather index 31 or newly created by weather derivative program 30. Weather derivative program 30 can also be used to determine the weather risk sensitivity of a business, operation, or activity, such risk sensitivity analysis being used in other evaluative processes. Weather derivative program 30 can also be used to determine the optimum parameters of a consumer or customer weather rebate program. Weather derivative program 30 can be used to compare the benefits and costs between entering a weather based derivative contract to hedge against weather risk exposure and/or offering a consumer weather rebate program.

In an implementation, a user accesses the weather derivative program 30 via a website by means of the web browsing application stored on user terminal 15. User access to weather derivative program 30 may be based on registration or subscription level. A registered user enters a user name and password information to access specific or preferred features of weather derivative program 30. Users that are not registered with the weather derivative program 30 may be forwarded to a registration interface, such as a subscription and registration webpage. The user may be required to submit a registration fee and personal information in order to complete registration. Unregistered users may be given limited access to weather derivative program 30.

Registered users are granted access to information, software tools and services which may include, for example, the library of weather indexes 31, a weather sensitivity analysis tool 35, a weather index creation tool 36, a weather risk correlation tool 37, a derivative pricing and execution tool 38, a derivative trading tool 39, a weather rebate analysis tool 40, and a weather rebate creation and management tool 41. Each of library of weather indexes 31, weather sensitivity analysis tool 35, weather index creation tool 36, weather risk correlation tool 37, derivative pricing and executing tool 38, derivative trading tool 39, weather rebate analysis tool 40, and weather rebate creation and management tool 41 may be a module of weather derivative program 30 or may be a separate application or program in communication with weather derivative program 30.

Weather sensitivity analysis tool 35 may be a functional module within weather derivative program 30 or may be a unique application in communication with weather derivative program 30. Weather sensitivity analysis tool 35 analyzes data provided by the user — -including business data, supplier information, geographic information and critical time periods — and correlates the revenue with historical weather events such as precipitation, temperature, humidity, barometric pressure, visibility, and wind. Based on the correlation, the weather sensitivity analysis tool 35 identifies the impact of one or more weather related events or period of events on the user's business, operations, revenue, yield, or other parameter. The analysis may also include suggestions of relevant weather indexes chosen from weather index library 31 that apply to the user's business or industry.

A registered user may view weather indexes recommended by the weather sensitivity analysis tool 35 and subscribe to such identified indexes or any other index included in weather index library 31. Indexes included in weather index library 31 and provided by weather derivative program 30 may be associated with specific weather challenges faced by particular industries or businesses. The weather indexes can be assigned to individual or aggregate geographic locations, may vary by time period and can be produced and published on the website by the weather derivative program 30 on a daily basis. In addition, weather derivative program 30 allows registered users to view historical performances of the indexes as well as forecast future performance.

Because weather based risk exposure includes many variables, a user facing unique or specific natural risk exposure may not have an adequate correlation between the users natural risk exposure and an existing weather index included in weather index library 31. In such circumstances, weather derivative program 30 allows users to create a new and unique weather index via weather index creation tool 36. User specific weather indexes created using weather index creation tool may be based on an existing index or based on weather, time and location parameters that represent a financial weather risk associated with a specified industry. Once a user creates a user specific weather index, the index may be added to the users subscription or user profile and may also be stored in weather index library 31 for future use by the user creating the user specific index or by other users. In one implementation, use of a weather index in a derivative contract by a user other than the user who created the index may generate a fee that at least partially is returned to the generating user.

A registered user is able to view weather indexes based on the user's subscription or user profile. With index parameters and performance displayed, and an analysis of weather sensitivities performed, the user is in a position to purchase a weather based derivative based on the indexes available. Weather derivative program 30 allows registered users to submit requests for pricing and execution of weather derivative contracts using weather derivative pricing and executing tool 38. In response to user requests, the weather derivative pricing and executing tool 38 performs an automated procedure to price derivative contracts based on selected weather indexes and execute those contracts with counterparties. The automated process can include generating requests for bids (RFB), confirming the trade of derivative contracts between parties, settling of derivative contracts, and managing agreements between users and counterparties.

An example of an implementation of the method of FIG. 1 and system of FIG. 2 is depicted in the flow chart of FIG. 3, in which weather indexes are presented for review 201, a weather index is selected 202, either from an index library or newly created 204, a derivative contract is requested 205 based on the selected index, derivative parameters are entered 207, derivative prices are generated 209, requests for bids on the derivative are generated 211, and the derivative contract is generated and executed 213. Both registered and unregistered users may select a link from the website to view 201 weather indexes supported by the weather derivative program 30. FIG. 4 illustrates an exemplary user interface as a web page, from which a user may view weather indexes from weather index library 31. The weather indexes may be selected from a navigation window 233 in which the indexes are grouped according to industry. Examples of industries in which the indexes are categorized include energy and power, agriculture, construction, travel, retail, government and destination attractions. Other industries may be included as well.

Upon selecting a particular industry from the window 233, a list of the corresponding weather indexes for that industry may be viewed in a main window 234. For example, if a user selects the "Industry A" link from the navigation window 233, as shown in FIG. 4, a list 236 of indexes specific to Industry A and corresponding to different geographic locations are displayed to the user in the main window 234. In the method of FIG. 3, the user may select an index 202 either from an index library or create a user-specific index 204. In the implementation of FIG. 4, the user may select a specific index from the list 236 to view more information on that index. However, as discussed below, the index information may be limited depending on the user's registration and subscription profile. Alternatively, the user may select one of the links 238 in the main window 234 to subscribe to a specific index or request a custom index.

Referring the method of FIG. 3, after selecting an index 202, the user submits a request 205 to the weather derivative program 30 to generate a derivative contract based on the chosen index. The user then enters derivative parameter values 207 relevant to the contract pricing. The parameter values may comprise: strike value, which is the value of the index at which the contract begins to pay out to the user; tick size, which is the unit of measurement by which the index increases or decreases; tick value, which is the payout per unit measurement; and maximum payout, which sets the maximum dollar amount that may be paid out. The user may also wish to change certain aspects of the index including whether they are buying a put or call option and to change the time period. Other parameter values may be used as well.

A derivative contract is automatically generated and priced 209 based on the selected index and the entered parameter values. In one implementation, derivative contract generation and pricing is accomplished by weather derivative program 30 of FIG 2, which may include the steps of requesting a price for the derivative contract from one or more counter-parties and pricing of the derivative, by the counter-party, based on an analysis of the probability of the event and impact of the request on an existing trading book. The derivative may be priced automatically through the system or through a manual process.

Referring to the method of FIG. 3, after approval from the user, notification of a request for bid on the derivative contract 211 is provided by the weather derivative program 30 to potential counter-parties or risk-takers that have an interest in executing the derivative with the user. Bids are submitted by the counter-parties to the weather derivative program and evaluated. After selecting a counter-party based on the received bids, a derivative contract is executed 213 between the user and the counter-party.

As discussed above, a user may register with the weather derivative program 30 in order to subscribe to weather indexes. An exemplary implementation for registration is shown in FIG 5. To begin the registration process, the user completes 301 and submits a membership application to the weather derivative program 30. Information that may be submitted in the application includes contact information, business information and verification information. Examples of business information include the industry in which the business competes and the business size. An example of verification information is credit card number and billing address. Other information may be provided as well. Once the membership application has been filled out and submitted, the program forwards the membership data to provider terminals 20 where the data is reviewed and verified 305 by customer service representatives.

In response to submitting the application, the weather derivative program 30 establishes 303 a provisional account for the user. The provisional account allows the user full access to the website while the membership data is verified. After the account has been created, a message is sent by the weather derivative program 30 to the user informing him or her of access to the site. The message may also include login information for future authentication. Upon attempting to access the site, the user is authenticated 307 and then directed to establish secure login information 309. The login information can include, for example, a password and a reset question in case the user forgets his or her password.

If the information submitted in the application process cannot be verified, a request is sent 311 by the weather derivative program 30 to the user seeking the correct or missing information. The user may submit a response to the weather derivative program 30 that includes the correct or missing information. If the information still cannot be verified, the weather derivative program 30 notifies the user that the application is denied 313 and closes the provisional user account. Although closing the provisional account restricts the user from viewing complete index information and prevents the user from requesting derivative contracts based on the indexes, the user may still view indexes with limited access, as discussed below.

FIG. 6 illustrates an implementation of a user interface, such as a webpage, displaying information specific to individual weather indexes. In the illustrated example, a heating degree day (HDD) index is shown for the northeast geographic region of the United States. Users that have subscribed to the selected index may view all information relevant to that index. The relevant information may include without limitation, for example, the present and recent index values 440, the historical index values 442 (e.g., ten, twenty and thirty year benchmarks), and the standard deviation of the index over a specified time period 444. Historical index values correspond to a previously recorded value of the index at a point in time comparable to the present index value. For example, the ten year historical index values illustrated in FIG. 6 correspond to the index values obtained ten years prior to the current index values, i.e., the 10 year historical values correspond to the values of the indexes between January 27, 1997 and January 31, 1997. Those historical values may then be compared with the present index values 440. Furthermore, a user may view forecasts of potential future index values as well as trajectories of the index, based on the historical values, for the remainder of the index period.

FIG. 7 depicts a method of viewing weather indexes available on weather derivative program 30. When a user selects 401 an index from weather index library 31, weather derivative program 30 verifies whether the user is a registered member through an authentication step 403 which may include checking the user name and password. If the user cannot be authenticated, limited index information is made available for viewing 405 on the user terminal and a link is displayed which allows the user to register with the weather derivative program 30 and subscribe to the selected index. Once the user is authenticated, the weather derivative program 30 determines 407 the user's subscription profile by crosschecking the user account and the user selected index in the server memory. If a subscription has been purchased for the index, the user is allowed access 409 to the full index information. If the user has not subscribed to the selected index, limited index information is made available for viewing 405 on the user terminal and a link is displayed which allows the user to subscribe to the selected index.

An exemplary method of subscribing to a weather index is depicted in FIG. 8. Preliminarily, a user is shown a list of indexes. After selecting an index, the user submits 501, a request for a subscription which may include payment information necessary to process the request. Referring to the system of FIG. 2, the payment information can be passed from the weather derivative program 30 to the provider terminal 20 where the information is verified. On a provisional basis, the weather derivative program 30 provides 503 the user with full entitlement to view all of the selected index information until verification is complete. Once payment is verified 505, the user has full access to the selected index information for the period stipulated by the subscription. In some implementations, the user may have full access for the entire time period in which the index is applicable or the user may have full access on a weekly, monthly, quarterly or annual basis. If the weather derivative program 30 is unable to process the payment information 507, the user is contacted with a request to resolve the payment conflict. If the payment conflict cannot be resolved, the weather derivative program 30 cancels 509 the provisional subscription and revokes the entitlement of the user to view the information related to the selected index. In some implementations, the weather derivative program 30 may restrict viewing of a custom index so that only the user who requested creation of the custom index has access to it. If a particular weather index is not presently available, the weather derivative program 30 may create a customized user-specific index based on a user request. FIG. 9 depicts an exemplary method for requesting a user-specific weather index. After authentication, the user submits a request 601 to the weather derivative program 30 for a custom, user-specific weather index. The request for a custom user-specific index may include the geographic location or locations of interest to the user, a time period to which the index will apply, the specific weather events or conditions the user is looking for financial protection against, and the particular need for the index. Other information relevant to the custom index may be included as well. The weather derivative program 30 passes 603 the custom index information to a product developer who reviews the request via provider terminal 20 of FIG. 2 to determine the feasibility of creating the index 605. If the product developer determines that it is not feasible to create the index, a notification is sent to the user that the request cannot be completed. For example, historical weather information may not be available for the specified geographic location. The request for a custom index may be denied for other reasons, as well. Alternatively, if it is feasible to create the index 607, the user is notified that the request for a custom index will be fulfilled. Once the new index is created, the weather derivative program 30 notifies the user and requests confirmation that the index parameters (e.g., geographic location, specific weather event, etc.) are correct. After the custom index has been verified, it is made available for inclusion in the weather index library 31 and for use by weather derivative program 30.

As previously discussed, weather derivative program 30 may include weather index creation tool 36, which evaluates the information submitted by the user requesting a custom, user-specific index and calculates historical index values for the specified geographic location and time period. Index trajectories may also be estimated based on historical values and a forecast of future index values may be provided.

In some implementations, the weather derivative program 30 may also estimate a weather index trajectory based on weather forecasts. An example of an index trajectory plot

651 is shown in FIG. 10. The recorded index value over time is represented by the solid line

652 in the example plot 651. The present index value corresponds to the value of the solid line at the crossing with the vertical dotted line 653. The shaded regions 655 and 656 corresponds to confidence intervals for estimating the future value of the index.

An exemplary method of pricing and executing a weather derivative contract is depicted in FIG. 11. For users looking to hedge their weather related risk, requests may be submitted to the weather derivative program 30 to create a derivative contract based on a particular weather index. Pricing and executing weather derivative contracts may be accomplished by derivative pricing and executing tool 38, in which the user submits a request to identify and contact a counter-party that is interested in assuming the risks identified in the index. When placing the request for a derivative contract, the user submits 701 contract information to the weather derivative program 30. Contract information may comprise, for example, the underlying index on which the contract is based, tick value, tick size, strike value, and a maximum payout of the contract. Other contract information may be included in the derivative contract request as well.

After submitting the derivative contract request, the weather derivative program 30 generates 703 a request for bid (RFB) for the derivative contract. The RFB specifies the derivative contract details. The derivative contract details can include, for example, the underlying index on which the derivative is based, the geographic location(s) and time period to which the index applies, the payout information of the contract {e.g., strike value, tick value and limits), as well as the current bidding price. The RFB's may be made available for viewing through the website or automatically sent to potential counter-parties. For example, members registered with the weather derivative program 30 may customize their accounts so that they automatically receive RFB's pertaining to a specified industry, such as construction. Counter-parties may review the RFB through the website and submit a bid 705 on the derivative. Alternatively, counter-parties may have the review and pricing of the derivatives automated through the weather derivative program 30 or through a separate program stored on the user terminal. At the close of bidding, the weather derivative program 30 notifies 707 the user and counter-party of the winning bid and requests approval of the pricing. In some implementations, the two parties may continue to negotiate pricing 709 for the contract by submitting counter-offers to the weather derivative program 30 until an agreement is reached. If no agreement can be reached, the user or counter-party may also submit a notice 712 the weather derivative program 30 that they intend to exit negotiation without executing the derivative contract.

Should the user and counter-party submit their respective approval of the pricing for the derivative contract, the weather derivative program 30 generates 711 a settlement agreement to be executed by both parties. The settlement agreement is a standardized contract between parties that enter into derivative transactions. The settlement agreement specifies general terms and conditions that cover, for example, basic corporate representation, tax representation and default and termination events. The settlement agreement does not, however, specify details of the specific derivative contract between a user and counter-party. The user and counter-party may agree to the contract, for example, by sending a confirmation e-mail to the weather derivative program 30 or by confirmation via the website hosted by weather derivative program 30.

Examples of settlements include a bilateral over-the-counter settlement and a cleared over-the-counter settlement. The bilateral over-the-counter settlement utilizes an

International Swaps and Derivatives Association (ISDA) master agreement which stipulates the terms of a credit guarantee between two parties (e.g., the user and counter-party) and includes rules for how to handle credit and liquidity default scenarios. Should the user and counter-party agree to a bilateral over-the-counter settlement, the weather derivative program 30 can generate the ISDA master agreement for viewing and confirmation by both parties.

In a cleared over-the-counter settlement, the weather derivative program 30 will match and connect the user and counter-party with a commodity exchange. The commodity exchange guarantees the trade of the derivative and assumes all forms of credit and liquidity risks for a fee. Receipts and confirmations may be delivered from the exchange through the weather derivative program 30 to the user and counter-party. After a derivative contract is cleared over-the-counter, the derivative may be listed as a futures on the same exchange. In this case, other parties may purchase a position in the original contract on a future basis. Futures are not connected to the original counterparties. Instead, they are positions in the original contract as guaranteed by the exchange. After execution of the settlement agreement, the weather derivative program 30 generates and executes 713 a derivative contract confirmation form between the two parties. The confirmation form sets out the agreed commercial terms of that trade which includes, for example the parties involved, the contract price, the agreed payout amounts and the specific weather conditions required for payout to occur. Similar to the settlement agreement, the parties may execute the contract, for example, by sending an e-mail notification or by submitting approval through the website.

Payment for the contract may be automatically deducted by an electronic funds transfer from the user's account, in which the billing account information is provided during registration. Similarly, if the specified weather event occurs under the conditions stipulated in the contract, the weather derivative program 30 may automatically deduct from the counter-party a payment proportional to the difference between the present index value and strike value. The payments may be transferred to an escrow account and distributed by weather derivative program 30 at the end of the period specified by the weather index. If the weather event does not occur, the counter-party receives payment for the derivative contract and no payment is made to the user's account.

In some implementations, the counter-party may no longer wish to hold the risk associated with the derivative contract. The counter-party may then trade the derivative to another registered user willing to assume the risk of the contract. An exemplary method of trading weather derivative contracts is depicted in the flow chart of FIG. 12. The counterparty submits 801 a trade request to the weather derivative program 30. The trade request specifies the derivative to be traded. The weather derivative program 30 then lists 803 the derivative contract as available for sale to a third party. The list may include information about the weather index, the geographic location, the time period and pricing of the contract. Other information related to the derivative may be included as well. Should a third party agree to the trade, the weather derivative program 30 generates 805 a trade contract to be executed between the two parties. As with the original derivative contract, the parties may execute the contract, for example, by sending an e-mail notification to weather derivative program 30 or by submitting approval through the website.

In addition to viewing weather indexes and purchasing derivative contracts, the weather derivative program 30 may also provide a means for registered users to analyze their financial sensitivity to specific weather events. For example, a user may upload revenue data to weather derivative program 30, which then extrapolates a correlation between potential weather events and financial gains or losses via weather sensitivity analysis tool 35. Based on the results of the correlation, the weather derivative program 30 may also recommend appropriate weather indexes that would assist the user in managing their derivative investment strategies.

An implementation of a method for requesting a user-specific weather sensitivity analysis, such as for example, a revenue-weather correlation analysis is shown in FIG 9. After authentication, the weather derivative program 30 provides 901 a description of the weather sensitivity analysis tool used to develop the correlation. The user then uploads 903 revenue data to the weather derivative program 30. The revenue data may be submitted in a spreadsheet or document file. Other files may also be used to enter the revenue data. The user may also enter the correlation time period, the geographic location of interest, and any further information that may be relevant to the correlation model, such as particular weather events of interest. A fee for providing the correlation analysis may be deducted from the user's account, as well. The weather derivative program 30 then generates 905 a revenue report based on the information provided by the user and displays the report on the user terminal.

In another implementation, referring to Fig. 2, weather sensitivity analysis tool 35 analyzes data provided by the user — including business data, supplier information, geographic information and critical time periods — and correlates the revenue with historical weather events such as precipitation, temperature, humidity, barometric pressure, visibility, and wind. Based on the correlation, the weather sensitivity analysis tool 35 identifies the impact of one or more weather related events or period of events on the user's business, operations, revenue, yield, or other parameter. The analysis may also include suggestions relating to the benefits and costs of offering a weather based consumer rebate. The analysis of various rebate structures and thresholds can be performed within rebate analysis tool 40. A weather based consumer rebate is a financial incentive to consumers, customers, clients, and stake holders to change purchase or participation behavior. Weather based rebates can increase demand for a product or service, or participation in an event by offering a partial or complete refund, credit, or other inducement should the consumer be unable to fully use or participate in the underlying good or service.

For example: a snow mobile retailer can offer a $1000 rebate if a vehicle is purchased in an offseason month and the accumulated snowfall does not reach a defined amount by a specified date. Rebate analysis tool 40 correlates the user's weather exposure and its relation to profits with the cost of a rebate program. In the above example, rebate analysis tool 40 provides the user with an analysis showing the likely draw or increase in customers, the resulting increase in profits offset by the cost of the rebate program in the event the threshold occurrence should take place. Rebate creation and management tool 41 creates and administers specific rebate programs based on the user's risk sensitivity analysis and inputs from the rebate analysis tool 40. Rebate creation and management tool 41 will automate and enable the essential areas of the rebate program operations, from customer interaction via a web interface, decision support and core administrative function to back office processing and enterprise infrastructure, through customer fulfillment or payment.

Other implementations and features are within the scope of the following claims.

Claims

WHAT IS CLAIMED IS:

1. A method of executing a financial derivative comprising: assessing a customized risk sensitivity profile attributable to one or more weather events; correlating the risk sensitivity to one or more financial indexes; creating a financial derivative based on the one or more financial indexes; and executing a financial derivative between two parties.

2. The method of claim 1 wherein the risk sensitivity profile is customized based on user specific criteria.

3. The method of claim 1 wherein correlating the risk prioritizes multiple financial indexes;

4. The method of claim 1 wherein the one or more financial indexes are chosen from a pre-existing list of weather based financial indexes.

5. The method of claim 1 wherein the one or more financial indexes are newly generated to match the risk sensitivity profile.

6. A computer readable medium having stored thereon a computer program that, when executed, causes a computer to perform the steps of: displaying one or more weather based financial indexes; performing a weather sensitivity analysis to produce a weather sensitivity profile; correlating the weather sensitivity profile with the one or more weather based financial indexes; generating a financial derivative based on the correlated weather based index.

7. The computer readable medium of claim 4 wherein the one or more weather based financial indexes are chosen from a list of pre-existing indexes

8. The computer readable medium of claim 4 further comprising the step of: generating a new weather based financial index based on the weather sensitivity profile.

9. The computer readable medium of claim 5 wherein the newly created weather based financial index is displayed with weather based financial indexes chosen from a list of pre- existing indexes.

10. The computer readable medium of claim 4 wherein the step of generating a financial derivative further comprises the steps of: requesting a derivative contract based on a correlated weather based financial index; entering derivative parameters; pricing the derivative contract; submitting over a network requests for bids on the derivative contract; receiving bids for the derivative contract; and executing the priced contract.

11. A system for arranging a financial contract between a first user and a second user comprising: a communication network; one or more user devices connected to the communication network, the user devices including displays; one or more servers connected to the communication network and configured to: present on each of the displays, via the communication network, an interactive program wherein the interactive program: displays one or more weather based financial indexes; performs a weather sensitivity analysis to produce a weather sensitivity profile; correlates the weather sensitivity profile with the one or more weather based financial indexes; and generates a financial derivative based on the correlated weather based index.

12. The system of claim 9 wherein the interactive program generates a new weather based financial index based on the weather sensitivity profile.

13. A method of utilizing weather risk sensitivity, comprising: identifying user specific business data; assessing a customized risk sensitivity profile attributable to one or more weather events; determining an optimal customer rebate based on the risk sensitivity profile, comprising; identifying threshold weather events based on historical weather data, and assessing rebate participating and payout parameters; reporting rebate program parameters, wherein the program parameters comprise a projected rebate program cost

14. The method of claim 13 further comprising: correlating the risk sensitivity to one or more financial indexes, the financial indexes having a projected performance;

15. The method of claim 14 further comprising: creating a financial derivative based on the one or more financial indexes; and executing a financial derivative between two parties.

16. The method of claim 14 further comprising comparing the projected rebate program cost against the financial index projected performance.

17. The method of claim 12 further comprising recommending a rebate program.

18. The method of claim 15 further comprising recommending a rebate program and a financial derivative.