FINANCIAL RISK MANAGEMENT BY DERIVATIVES CAUSED FROM WEATHER CONDITIONS: ITS APPLICABILITY FOR TÜRKİYE

Abstract

AbstractWeather is the major uncontrollable factor that influences the development of agricultural and industrial products. Because there is a strong correlations between the fluctuation of production volume and the weather. Unanticipated changes of weather conditions cause important fluctuations on companies' revenues and profits. They also create evidently effects on general economic trends. Such effects have derived weather risk management concept and new financial instruments as named weather derivatives. The term weather derivatives applies to a fairly new class of weather risk management tolls that are structured like put options, call options, and swaps in the capital markets. By using a weather derivative, the company's profit levels are less dependent on foreign exchange rates as minimum incomes are projected in advance, and financial forecasts are more accruate and predictable. The strengthened risk management portfolio, combined with more transparent account, and revenue stability, also results in a lower cost of debt and makes corporate development and expansion planning easier. Weather derivatives mostly being used by developed countries are traded in the organized and OTC markets. Henceforth, they hedge lots of industries' financial statements against corrosion of weather risk, and present multi-functional advantages to users. In this article, we have analyzed the structure of weather derivatives, and discussed the applicability of these non-used financial instruments for Turkiye.