Sunday, March 4, 2007

Sunny? Rainy? Company Makes Money Selling Weather Derivatives

Weather prediction is an inexact science only getting in-exacter and less predictable as global warming spins weather systems into worldwide confusion. David Friedberg, 26 years old ex-Google executive decided to take advantage of that.

His recently launched Web 2.0 company, wants to sell weather derivatives. “You don’t really think about it, but 70 percent of businesses are affected by the weather every year, across regions and industries,” says Friedman. “The weather affects so many different types of businesses, whether in negative or in positive ways, like taxi cabs in New York, which are often full in the cold.”

Friedberg with his "computer science friends" developed an elaborate website which allows businesses to buy contracts that would pay them when they’re hurt by the weather - too hot or too cold; too rainy or too dry. The hope is that the bets will offset each other: Rain might hurt an amusement park, but help a farmer.

The website includes tools for businesses to generate a risk formula based on revenue and dependence on weather. Businesses can buy contracts for weather in 200 cities, choosing a precipitation level and temperature, and the number of days the weather has to be at a certain level before the policy kicks in. The cost of a contract is derived from a complex formula based on historical weather data, weather predictions and the risk already in the system.

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