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Derivatives

Lack Of Dealers Slows Market Growth

The absence of many of the major investment banks from the weather derivatives market and the low risk-appetite of some of the participants is keeping the market from fulfilling its potential, according to WRMA delegates and speakers.

The absence of many of the major investment banks from the weather derivatives market and the low risk-appetite of some of the participants is keeping the market from fulfilling its potential, according to WRMA delegates and speakers.

Ross McIntyre, director in weather derivatives at Deutsche Bank in London, which is one of the most active players, suggested one factor holding dealers back may be a reluctance to take on risk. Dealer's have to take on risk to give clients value, there is no getting around this, he stated. Catherine Woolgar, weather derivative pro at ABN AMRO in London, added that the difficulty of hedging positions, due to the market's lack of liquidity, may be another factor keeping dealers out.

John Polasek, WRMA's outgoing president and v.p. of the weather risk management group at Entergy-Koch Trading in Houston, predicted that although the market currently stands at only around USD5 billion (notional), it could grow to represent as much as a trillion dollars. In most sectors at least 10% of revenues can be impacted by weather and this risk can be managed with weather-linked debt, he said. In spite of recent issues, including a USD120 million weather-linked bond placed by Goldman Sachs, this market is still not near its full potential, he said.

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