Enron s weather derivatives

This research paper aims to focus on Enron, a large entity as a failed model of business. Enron initiates the transaction and probably engineered it to its advantage, in expected value, or because it has an opposite exposure.

weather derivatives pricing

Power Marketers are responsible for arranging the transmission of power to the purchaser. Unexpected decreases in demand e. For instance, the fully hedged firm might seek to exploit adversity imposed on the unhedged firm.

Megawatt MW : One million watts or one thousand kilowatts. How should Mary Watts proceed? Upon discovering a methodology for hedging its own weather risk, Enron believed that this innovation could be useful for its customers as well, and set out to create customized products to help customers manage their own weather risk.

Enron s weather derivatives

This reflected economic sectors as disparate as agriculture, apparel retailing, and ski resorts that depended on appropriate variations in weather. It marketed natural gas liquids worldwide and operated one of the largest natural gas transmission systems in the world, totaling more than 36, miles. Heating degree days are one of the most common index types for weather derivative evaluation. Counterparties such as utilities, farming conglomerates, individual companies and insurance companies are essentially looking to hedge their exposure through weather derivatives, and funds have become a sophisticated partner in providing this protection. Lower Cost of Capital. Ideally, manufacturers would produce, and retailers would stock, the exact quantity of product that customers would buy. Power Marketer: A company that buys and resells electricity, and therefore assumes economic risk in the transactions. Degree-days were determined by the deviation of the average daily temperature from an established benchmark of 65 degrees Fahrenheit. This clause stipulated that Aquila would pay ConEd a rebate if August turned out to be cooler than expected. A midwestern state might buy a snowfall ceiling cap that would compensate it if snowfall exceeded a certain level—this payment would help to reimburse the state for excessive snow-removal expenses.
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Weather derivative