IBJ Structures Japanese Exotic Weather Deal

The Industrial Bank of Japan is structuring what is considered to be the first exotic weather derivative purchased by a Japanese gas company. "It's the first of its kind in Japan," said Hiroshi Matsui, senior manager of derivatives and fixed-income in Tokyo, pointing out that the deal combines weather, oil price and foreign exchange risk. He declined to name the counterparty.

IBJ expects to sell the contract by February. In the structure, IBJ will hedge the utility's exposure to a warm winter in 2002/3, which would reduce the buyer's profit through lower heating revenues. The structure will also use oil options to hedge crude oil prices rising as the price of oil increases and currency options to hedge oil price hikes caused by the dollar strengthening against the yen. Although it is yet to be finalized the deal is expected to have a notional size of JPY2-3 billion (USD16-24 million). Matsui declined to comment on the specifics of the transaction, as the deal is still under negotiation.