Parametric
Last updated
Last updated
Parametric contracts were introduced in the insurance field decades ago about the time weather derivatives were introduced. Basically they are simply contracts that specify a defined payout amount that will be made from one party to another if a specific condition is met.
The defined terms (parameters) are very specific, leaving no ambiguity. These structures gained a lot of popularity as there was no longer a subjective and potentially drawn out adjustment period before the protected party is paid.
Parametric structures in WeatherMage are of two different types:
1) LANDFALL
A buyer of a Landfall contract receives 100 credits if a named storm listed as Category 1 or higher makes landfall with the contract defined state. There are four landfall state contracts in WeatherMage: Texas, Louisiana (includes coasts of Mississippi and Alabama), Florida, and the Southeast (covers the coasts of Georgia, South Carolina, and North Carolina).
Multiple landfalls can occur if a storm maintains its status after returning to the Atlantic or Gulf, and makes landfall in another state.
Once a storm makes landfall, the respective market is locked to 100 for each contract. The user must then close of the position to realize this profit or loss.
When a storm loses its named status, all locations that did not experience a landfall will be market locked to -0-. Again, all users must close their landfall positions out to realize their gains or losses.
2) AREAS
The second parametric contract type in WeatherMage are area boxes. These areas are shown as boxes in the seas and oceans.
Area parametric contracts pay 100 credits to the buyer if a named storm listed as Category 1 or higher enters the specified area. In WeatherMage, this is triggered when a this storm moves within 100 miles (160.93 km) of the stated area center. Similar to landfall contracts, multiple area parametric contracts can trigger during a single storm.
When an area is triggered, the respective market is locked to 100. All other markets remain open.
When a storm loses its named status, all non-triggered area markets are locked to -0-.
The trader's profit or loss from the contract will also be fixed based on where the market is set.
Again, all users must close out their parametric positions to realize their profits or losses.
DISTANCE GRAPH
When trading landfall or parametric markets, the top left chart presents the distance (in kilometers) between the traded location and the active storm. An icon for the storm is also presented along with a historical track on the map screen. The largest icon (that spins) is the most recent location for the active storm.
WeatherMage allows traders to place parametric trades also as these are fast becoming a very important part of weather derivatives. Parametric markets offer an opportunity to bring in a vast pool of risk takers that could drastically lower the cost of risk transfer. This is crucial as climate change is increasing both the likelihood and severity of extreme weather events in populated areas.
