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Weather Derivative
Weather derivative is a financial instrument used by companies who want to hedge against the weather related risk.
Investor who sells a weather derivative bears the risk of a bad weather that could besiege the buyer of the weather derivative. If weather happens to be positive for the buyer, seller collects the profit. However, if the weather turns inimical for the buyer of such derivative, seller must pay agreed amount.
Weather derivative is like insurance against more common events such as dry summers.
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