Weather Risk and Derivatives

Robert Joniec (M.Sc., FCII, , Research Assistant at the Cologne Research Centre for Reinsurance (headed by Prof. Stefan Materne) at the Cologne University of Applied Sciences), PhD Student at the University of Limerick) |

Introduction

The introduction of derivatives as financial instruments in the 1980s had a profound impact on the financial industry and led to great attention in academic research. Today, derivatives are a basic instrument in risk management, said to be able to increase firm value through reduction of earnings volatility. The reduction of volatility comes in a form of insurance and costs a certain premium. Until now academics have not accomplished to give proof for a generally applicable positive relationship between the usage of derivatives in a firm’s risk strategy and subsequent increase in the firm’s value. Research is subject to availability of according data and even if it can be used it is difficult to isolate