The weather derivates market started in 1997 in the US as the firsttransaction in this regard was recorded there but now this weatherderivatives market has spread to all major markets. According to US energymarket, US$ 1 trillion of the US economy is affected by the weather risk. Bythe year 2000 about US$ 3.5 billion worth of weather derivates were tradedin the US. There are 4 major players in the weather derivates market :
INSURANCE AND REINSURANCE COMPANIES.
END USERS such as Gas and power marketers and utilities etc.Derivative is a contract or a security whose value or payoff derives from theprice of an underlying asset. Derivatives help an investor to control the risksof changes in the prices of the underlying asset. For eg. An exporter whoreceives his payments in foreign currency is exposed to currency risk ie therisk of home currency appreciating with respect to the foreign currency.When Rupee started appreciating against the US Dollar the textile exportersand IT companies faces heavy losses if they had not hedged their positions.