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Stern H (2008) Managing business risks arising from seasonal climate variability. 3rd Annual Conference of the Australian and New Zealand Chapter of the Society for Risk Analysis, September 30 October 1, 2008, Canberra.

In a 1992 paper presented to the 5th International Meeting on Statistical Climatology (Stern, 1992), the author introduced a methodology for calculating the cost of protecting against the onset of global warming. The paper, 'The likelihood of climate change: A methodology to assess the risk and the appropriate defence', was presented to the meeting held in Toronto, Canada, under the auspices of the American Meteorological Society (AMS). In this first application of what later was to become known as 'weather derivatives', the methodology used options pricing theory from the financial markets to evaluate hedging and speculative instruments that may be applied to climate fluctuations. Use of these financial instruments leads to those concerned being compensated provided they are on the correct side of the contract. Conversely, those on the wrong side of the contract would have to provide that compensation.

The current paper explores the application of some of these strategies on a shorter time scale - the management of business risks related to seasonal climate variability in the southeastern Australian State of Victoria. To this end, Wolter and Timlin (1993) developed the Multivariate ENSO Index (MEI) as a tool to monitor ENSO on various variables observed over the tropical Pacific, namely, sea-level pressure, surface wind, sea surface temperature, surface air temperature, and cloudiness. The MEI is computed for each of twelve sliding bi-monthly seasons. The paper reports upon statistical relationships between the MEI, and rainfall, minimum temperature, and maximum temperature, in various Victorian Districts during the three-month season following, and describes the components of a system that may be used to automatically generate the fair value of contracts that could be utilised by businesses whose earnings are sensitive to seasonal climate variability in the management of associated risks.

For example, the output generated for JUL/AUG/SEP (2008) reads (in part): ... Specifically for Melbourne, the fair value price of a contract to protect a business against an unusually dry season, whereby you are paid $10000 if the rainfall in the forthcoming JUL/AUG/SEP season is in Tercile One (less than 136.7 mm), is $3196 Also specifically for Melbourne, the fair value price of a contract to protect a business against a season with unusually cool nights, whereby you are paid $10000 if the mean minimum temperature in the forthcoming JUL/AUG/SEP season is in Tercile One (less than 7.2 C), is $1061

Home Publications Presentations Climate of Victoria 10 Day Forecasts Seasonal Outlook Other Links