Thoughts on Weather Bill

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See this article on the new firm, which will offer daily weather prediction market-like contracts on temperature and precipitation (our host mentioned them earlier today).

A couple thoughts:

1. I really don’-t see that many accredited investors having so much exposure to daily weather risk that they’-ll feel the need to hedge at prices they’-ll assume imply negative expected value (given that both Weather Bill and the hedgies they offload risk on need their pounds of flesh).

  • Movie theaters are a nice example of someone who is long rain, but they are mostly owned by large chains. Portfolio theory suggests that public companies have no business paying to hedge risks that are not large enough to threaten bankruptcy.
  • The law of large #s helps people out with weather. Yes, rain is bad for a golf course, but really they care about a rainy summer (or decade) more than a rainy day. And memberships provide a means of offloading some of that risk on the golfers.

2. Weather isn’-t the kind of thing that a lot of people think they know a lot about (unlike, say, sports and politics). So I’-m not sure “-betting”- is going to save them.

3. Part of why the wholesale weather futures market hasn’-t taken off and has devolved into an OTC affair is an absence of liquidity trading. Only a few big utilities have a real need to hedge temperature (many are still hedged by the regulatory environment they operate in), and in an open market, there is the worry that you’-ll always be trading against someone with a better model than you.

4. What I think is most innovative is the idea of marketing a prediction market contract as “-insurance.”- But I’-d have started with housing. Sell me “-insurance”- against a 10% or greater decline in the SF property market, and then dynamically hedge with the new CME futures.

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