Weather derivatives help businesses manage climate risks in India

An Accenture strategist, Priyal Parab, has brought attention to a unique financial tool called weather derivatives as temperatures rise across parts of India. This comes as an early heatwave is hitting the west coast, with temperatures reaching over 38°C. In a post on LinkedIn, Parab explained how weather derivatives work. These are contracts tied to weather conditions like temperature, rainfall, and snowfall. This means investors can potentially make money based on changes in the weather. Parab provided a simple example involving an ice cream business. When temperatures rise, sales usually increase. But if there's a sudden drop in temperature or unexpected rain, sales might fall. She suggests that weather derivatives can help hedge against such unpredictable changes. The way these contracts function is similar to traditional derivatives, which derive value from underlying assets. In this case, they depend on weather indices—like temperature forecasts. For instance, an ice cream vendor could buy a derivative that pays out if temperatures drop below 30°C. Parab's post highlights an innovative approach to managing the risks posed by changing weather patterns. With parts of India already experiencing higher-than-normal temperatures, her ideas may help businesses adapt more effectively in the future.