CURRENT AFFAIRS
CURRENT AFFAIRS
Description
India has taken a significant leap in climate resilience by unveiling its first weather derivatives market. Developed through a collaboration between the National Commodity and Derivatives Exchange (NCDEX) and the India Meteorological Department (IMD), this new market introduces financial tools designed to manage weather-related risks. It offers a way for farmers, industries, and financial institutions to hedge against the unpredictable effects of climate, supporting smarter planning and investments in climate-sensitive sectors.
Understanding Weather Derivatives
Weather derivatives are financial instruments whose value is tied to specific weather variables like temperature, rainfall, wind speed, or snowfall. Unlike traditional insurance, which compensates based on asset loss, weather derivatives offer payouts based on predefined weather conditions. This allows entities to manage recurring climate-related risks that affect operational income or crop yields, offering stability and predictability in uncertain conditions.
Core Weather Metrics In Derivative Contracts
The primary metrics in weather-based trading are temperature and precipitation. For temperature-based contracts, indices such as Heating Degree Days (HDD) and Cooling Degree Days (CDD) are used to measure how far temperatures deviate from a set base. Rainfall-based derivatives track cumulative precipitation over time or deviations from historical averages. In more mature markets, contracts also cover snowfall or wind speed often tailored for ski resorts or wind energy sectors.
How These Instruments Operate
Rather than responding to extreme weather events, these derivatives are based on quantifiable weather outcomes. For instance, a rainfall futures contract might trigger a payout if rainfall in a specified area falls below a certain threshold. Settlements rely on pre-agreed data sources like IMD, ensuring accuracy and transparency. This makes weather risk management more systematic and reliable compared to informal methods based on forecasts or field observations.
Weather Derivatives vs. Traditional Insurance
Traditional insurance protects against severe losses such as floods damaging crops or property. Weather derivatives, on the other hand, are geared toward frequent, lower-impact risks like dry spells or cold snaps that reduce revenue. While insurance pays after damage is verified, derivatives provide predictable cash flow protection based on weather data. Together, these tools form a multi-layered approach to climate risk management.
Who Benefits And How
Farmers can mitigate the risk of weak monsoons, helping them secure input investments and repay loans.
Weather-dependent industries, such as beverages or apparel, can protect against seasonal demand disruptions.
Banks and financial institutions can manage loan default risks tied to weather shocks, making them more confident in lending to vulnerable sectors.
Boosting Resilience To Climate Variability
This initiative encourages a proactive approach to climate risk, shifting focus from relief efforts to risk prevention and sharing. It also increases the demand for accurate, real-time weather data, supporting innovation in agritech, climate analytics, and energy forecasting. By institutionalising weather risk management, India moves toward a more climate-resilient economy, empowering stakeholders with tools to adapt and thrive.
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