Weather risk management: a South African market perspective.

The weather derivative concept was created in the United States of America as a result of the deregulation of its energy industry. When other countries learnt of this concept they decided to enter the market as well. Thus a body called the Weather Risk Management Association was established. This body’s main function is to collate information pertaining to weather risk and to help the process of advancement and growth within the market. The weather risk market has grown tremendously and various participants across the world are using weather derivative products to protect the revenue of their respective companies against adverse weather condition. South Africa entered the weather risk market and it’s contracted its first weather contract in February 2000. The objective of this study is to evaluate the South African financial market perceptions on weather derivatives and to establish the feasibility of use. The study also places emphasis on the importance of evaluating the South African economic conditions in order to achieve the goal of the study. Hence the study evaluates the different aspects in terms of the legal, accounting, taxation, weather data, and structuring and pricing implications of a weather derivative transaction. Thus a survey was designed, forwarded, and received back from professionals in the legal, accounting, taxation, weather data, and structuring and pricing fields. This analysis was conducted to evaluate the South African financial market’s perceptions on weather derivative applications.Prof. C.H. van Schalkwy