🌥️ Weather Can Help You Earn Money?
If you've got a knack for telling when it's going to rain or shine, you can get rich! Here's how.
Did you know that it is possible to earn money just because today is a rainy day or a sunny day? Sounds crazy, right?
But it is possible. Thanks to a financial instrument known as a weather derivative.
So you just make a weather prediction, and if it turns out correct, you make money? Doesn’t that sound like gambling? You can do it with anything and everything. Be it the India vs Pakistan Match or on the poker table. What makes weather derivatives so special?
Your bets on weather are legal and regulated by the stock exchange.
Woah! But ReadOn, why does such an instrument even exist in the first place?
In today’s post, we will uncover it all.
Say Suresh has a rice field. Now rice needs lots and lots of water, and Suresh is dependent on rainfall for his water needs. So what will happen if it doesn’t adequately rain?
Suresh’s yield will be below expectation and he will suffer losses. Isn’t that a big risk? Almost as if Suresh is at the mercy of the weather.
Enter: Weather Derivatives (an instrument that derives value from the weather) to Suresh’s rescue.
Now Suresh can purchase a weather derivative where he can bet on a drought outcome. Meaning if it doesn’t rain, he will win the bet (and money). This way the loss he has to bear because of a bad harvest, will be compensated to some extent by the weather derivative.
But if the rains turn out to be amazing, all that he will have to bear is the premium amount that he spent to purchase the derivative.
Isn’t it amazing?
Just like Suresh hedged (or protected) himself in the farming business, weather derivatives can be used by energy companies, managers of sporting events and pretty much anyone and everyone whose income depends on different aspects of weather, such as temperature, rainfall and snow.
But here’s a small catch...
India doesn’t have Weather Derivatives Yet
These instruments were introduced in the US and Europe in 1997 and 1998 and have become pretty popular. Chicago Mercantile Exchange (CME) offers weather derivatives that can be traded electronically.
Weather impacted 3.4% of U.S. gross domestic product — or about $485 billion in 2008. The instrument was definitely the need of the hour then.
Now, India’s economy is more dependent on weather than the US.
Agriculture itself contributes about 18% to India’s GDP. Then why doesn’t India have any weather derivatives yet?
With the erratic weather patterns that we are witnessing right now, the introduction of weather derivatives is sorely needed. But at the same time, the move has to be well planned. It's not child's play. It involves several factors, such as pricing rules and deciding the optimum design of the instrument.
And so, SEBI has been investigating its feasibility since 2019. But they are yet to put their plans to action.
Other side of Weather Derivatives
Every coin has two sides. So do Weather Derivatives (or any derivative, for that matter). This instrument has a lot of benefits if used for legitimate hedging purposes. But if used for speculative purposes, there can be dire consequences as the derivatives market is very volatile and risky.
Case in point: Enron, one of the biggest scams of all time. Enron, a US-based energy company, derived most of its profits from trading energy derivative contracts. But the more it tasted profit, the more its hunger grew. It started getting into more complex arrangements, trading anything and everything that could be traded: coal, steel, paper, water and even weather.
This web of complexities got them into losses. To cover these losses they got entangled in another web of lies and deceit. And then, the downfall was inevitable.
All in all, as long as greed does not get the better of you, these instruments can be a wonderful way to shield against risks.
Do you think weather derivatives should be introduced in India ASAP?
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Not at all.... Let them real farming... Food production is basic need of world... Let farmers focus there and given support from govt if something not favouring them....