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Monday, 18 June, 2001, 02:07 GMT 03:07 UK
Cashing in on the weather
Sunbather on the beach
Companies can play the weather derivatives market
By Quentin Sommerville, Business Reporter

It has long been known that unseasonal weather can dampen spirits, but it can also hurt company profits., a new joint venture between the UK's Met Office and City firm Umbrella Brokers, will let businesses hedge their bets against the vagaries of the British climate.

By trading in weather derivatives - a sophisticated form of insurance - power companies can be protected against mild winters that cool profits and ice-cream makers will be covered against damp summers which wash out sales.

Met Office spokeswoman Amanda Green said: "Up to 70% of UK companies are exposed to some degree of weather risk, we're hoping to educate companies about the derivatives market so that they can more confidently hedge their exposure."

By bringing together science and business we hope to mitigate the risk facing companies

Chris Lawrence, Weatherxchange
But despite the capricious nature of Britain's weather, this kind of trading has so far failed to catch-on in Europe.

In contrast, in the US, the market is worth an estimated $9bn.

London wine bar chain Corney & Barrow has been one of the few European firms that have played the weather derivatives market.

Last summer the company struck a deal with Speedwell Weather Derivatives - an early pioneer in the field - which gave the chain a pay-out for every Thursday and Friday when the thermometer failed to climb above 24 degrees centigrade.

Precise measurements

The lack of a reliable, central supplier of weather information has hampered efforts to establish this kind of trading in Europe, according to Weatherexchange.

Unlike traditional insurance, this kind of futures trading allows companies or individuals to take a position on the most precise weather circumstances - down to how many inches of rain may fall on a given day.

"With ordinary insurance the policyholder takes on a burden of proof and you can normally only cover yourself against loss of business for a day - this is much more precise," says Weatherexchange's Chris Lawrence.

Ice cream van
Bad weather can damage ice cream sales
"It's been a very low key business in Europe because the data from country to country differed so much. But by bringing together science and business we hope to mitigate the risk facing companies," he said.

The deal represents one of the largest commercial deals for the Met Office - the weather and environmental research organization wholly owned by the UK government.

The weathermen have invested 500,000 of initial funding in the new company, which is a 50-50 joint venture with Umbrella Brokers.

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