Why Haven't Weather Derivatives Been More Successful as Futures Contracts? A Case Study

Why have some seemingly promising futures contracts not succeeded in the recent past? This paper examines one such example, the weather derivatives market. First, it provides a brief history of weather derivatives contracts as well as a description of these contracts. Next it reviews customised over-the-counter (OTC) weather derivatives contracts, as provided by reinsurers, and then it reviews why futures contracts are not as successful a method of risk transfer. Lastly, it describes how weather exposures do not sufficiently match up against the criteria for the successful launch of a futures contract.