Weather Trading Glossary

The Weather Trading Glossary is an alphabeticised listing of terms and phrases used by professionals in our market.

	Aggregate Retention	Retention of risk by the policyholder calculated by reference to the total of claims to be retained
	American Option	Option that can be exercised at any time up to expiration
	Annual Aggregate Limit	Retention of risk by the policyholder, calculated on the basis of retention of claims in total over a year
	Average Temperature	The average of the daily high and low temperatures
	Blended Cover	Mixture of insurance/reinsurance and other risk management techniques on a single policy
	Bond	Capital instrument issued by government or private corporation. Redemption may be linked to an event (eg. CAT bond)
	Bourse	An exchange where financial instruments are traded
	Call Option	Gives buyer the right to buy, seller is obliged to sell. Payout occurs if the derivative exceeds a predetermined strike level
	Cap	The maximum payout of a call option. Also known as a call spread
	CAT	Common term for a catastrophe
	Collar	A combination of a Put and a Call. Gives protection against reduction in revenue while foregoing a proportion of the profit
	Contingent Credit	Credit made available related to specific events and limits
	Contingent Surplus Note	Contract to supply equity at fixed interest
	Contract of Difference	Contract where future liability is based on difference (eg. an index price above a fixed minimum)
	Convertible Share	Share that can be converted to another class (eg. debenture (fixed interest) to an ordinary share)
	Cooling Degree Day (CDD)	Difference between the actual temperature, as determined by the average of the high and low daily temperatures, and 65 degrees F. For example, if the daily high temperature is 77 degrees and the daily low is 65 degrees, the actual temperature for that day would be 71 degrees. The CDD's for that day would be 6 (71-65). If the average temperature is less than or equal to 65 degrees, the CDD's for the day would be zero
	Cost of Risk Formula	Formula to measure the insurable risk of a company
	Critical Day Option	A day is termed critical if certain atmospheric conditions are met. The options payout becomes a result of the number of critical days rather than a cumulative degree day total
	Cumulative Degree Days	Sum of the daily Heating or Cooling degree days over a specified period
	Dedicated Vehicle	Company or entity set up for a specific purpose (eg. reinsuring catastrophe risk)
	Deductible	First part of loss borne by policyholder
	Defeasance	Used in connection with a bond issue, describes the amount of risk faced by holders of the bonds. A fully defeased issue means that principal and interest are at complete risk of loss
	Degree Day	Term created to better forecast demand for energy. Number of degree days is calculated from the difference between actual temperature and a previously set level (usually 65 degrees). Expressed in Cooling Degree Days or Heating Degree Days
	Derivative	A financial contract the value of which is derived from another (underlying) asset, such as an equity, bond or commodity
	Disintermediation	The process of eliminating the middle-man. Such as an insured going to the capital markets for insurance-like products without the use of a re/insurer
	Domicile	Tax haven
	European Option	Can only be exercised on the expiration date. The majority of weather options are traded as Europeans
	Exotics	Derivatives that are either complex or are available in emerging economies (plain-vanilla) - typical exchange traded
	Fair Value	The expected value of an option at payout
	Fixed Rate Note	Borrowing at fixed rate
	Floating Rate Note	Borrowing at a pre-determined variable rate
	Floor	Maximum payout of a put option. Also known as a put spread
	Forward	Commits user to buying or selling and asset at a specific price on a specific date in the future
	Frictional Cost	Expenses of providing a service
	Future	Forward contract that is traded on an exchange
	Heating Degree Day (HDD)	Difference between the actual temperature, as determined by the average of the high and low daily temperatures, and 65 degrees F. For example, if the daily high temperature is 55 degrees and the daily low is 35 degrees, the actual temperature for that day would be 45 degrees. The HDD's for that day would be 20 (65-45). If the average temperature is greater than or equal to 65 degrees, the HDD's for the day would be zero
	Hedging	Act of reducing risk
	Index	The cumulative number of degree-days, or another weather condition over a period for a specific location
	Index Based Contracts	Options contracts based on an index. The value of the derivative is derived from the index. Variation between actual losses and those derived from the index creates basis risk
	Interest Rate Swap	An exchange of financial instruments to give each party their preferred position
	Knockout	Option in which all payouts occur as a flat amount, and not per unit
	Leverage	Amount of money put at risk by a derivative is much bigger than the down payment that was made when it was traded
	Option	A contract which gives the buyer the right, but not the obligation to buy or sell a particular asset at a particular price
	Option Expiry	The date when the holder has the right, but is under no obligation, to exercise the contract
	Over The Counter (OTC)	A derivative that is not traded on an exchange but purchased from an investment bank
	Payment Account	Opposite to an experience account. Money is moved from the experience account to the payment account to be specifically paid out in losses
	Pay-out	The amount an option/swap buyer/seller receives/pays
	Perfect Hedge	A hedge which correlates perfectly with the risk. Insurance contracts enable perfect hedges because the contract either pays or doesn't depending on a fixed trigger
	Precipitation	Collective name for moisture, in liquid or solid form, which falls from the atmosphere
	Premium	Amount paid to purchase an option
	Principal	Amount representing capital base
	Principle Amount Note	A promise to repay the principal on defined terms
	Private Placement	An investment opportunity which requires no registration with the SEC
	Put Option	Gives buyer the right to sell - buyer has to buy
	Redeemable Preference Shares	Give priority in payment of interest in shares of capital, redeemable shares can be bought back by the insurer
	Small Cap	PCS Option contracts which limit the aggregate amount of losses that can be included in the contract to $20 billion
	Speculator	Someone who wants to accept a risk because of the likelihood of substantial profit
	Spread Loss	Contract which uses a formula to spread the cost of losses over a number of years
	Spread Option	Option on difference between two contracts
	Strike Price	Price where future or option contract operates
	Surplus Note	Additional funding to augment policyholder surplus in times of need
	Swap	Two companies exchange cash flow linked to a liability or asset
	Temperature	Measure of the degree of heat or cool of a substance
	Tranche	Term to describe a specific class of bonds within an offering, usually each tranche offers varying degrees of risk to the investor
	Trust Fund	Fund established to safeguard resources
	Unbundling	The separation of different elements such as loss control from the actual risk financing
	Volume Risk	The effect of demand on revenue
	Weather Exposure	A risk borne by an organisation or individual which is due to climate volatility
	Weather Hedge	Product which allows buyer to partially or fully offset climate related risks
	Zero-Beta Asset	An investment which doesn't correlate with an index or market results
	Zero-Coupon Security	Security where no interest is paid