The application of weather derivatives to mitigate the financial risk of climate variability and extreme weather events

Evidence of the challenge faced by the meteorological community to become skilled in applying risk management products from the financial markets is growing. This paper presents an approach to the pricing of weather derivatives that employs a combination of empirical data including forecast verification data, regional synoptic classification data, and data associated with climate indices on a global scale, such as the Southern Oscillation Index. The paper presents several illustrative examples that show how to price these options about the occurrence of an unusual weather event, using forecast verification data and synoptic classification data.