Weather Derivatives, Hedging Volumetric Risk and Directors' Duties
Company and Securities Law Journal, Vol. 18, March 2000
Posted: 26 Apr 2001
Weather derivatives are a new risk management tool that enables companies to manage weather-related declines in the demand for the products or services supplied by those companies.
This article provides an overview of exchange-traded weather derivatives and the application of securitisation technology to the management of weather risk (including an overview of the Kelvin weather risk securitisation sponsored by Koch Energy, in late 1999). In addition, the article considers whether the directors of a company, whose revenues are subject to weather-related volumetric risk, are obliged under Australian law to employ weather derivatives to reduce weather-related volatility in earnings.
There is no specific legal duty - imposed either by statute or principles of common law - requiring the directors of an Australian company to use derivatives to hedge price or volumetric risk. However, in view of the Australian cases on directors' duties of care and skill, there is a risk that an Australian court may find directors to be in breach of such duties, where their company suffers a loss due to the absence of an appropriate hedging programme.
Note: This is a description of the article and not the actual abstract.
Keywords: Weather Derivatives, Volumetric Risk, Directors' Duties
JEL Classification: G34, K22
Suggested Citation: Suggested Citation