When April showers come your way, they could rain cash

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The Independent Online

Britain's favourite topic of conversation is now becoming a hotly traded commodity. Weather futures are emerging as one of the fastest-growing financial instruments, and the potential market is expected to be worth around £10bn within a couple of years.

Weather futures allow storms, snow, hurricanes and floods to become tradable financial products. Companies and individuals can buy a contract based on a particular weather pattern that will pay out according to what happens. Although the market is only fledgling, the London International Financial Futures and Options Exchange (Liffe) has seen the huge potential. The US market for weather futures has been running for nearly two years and is worth $9bn (£6.1bn). Liffe expects to be properly trading the weather futures contracts by the end of the year. The derivatives have arisen because of the increasing problems that many industries have with weather. Seventy per cent of companies are said to be vulnerable to weather in some way, and global climate change is making weather patterns more extreme.

The US weather derivatives market has attracted big trading companies. In 1999 a group including Cantor Fitzgerald and TXU Energy Trading formed TradeSpark. The weight of demand has doubled the number of derivatives on offer. The first companies to become involved were providers of electricity and gas. In a mild winter, analysts have found, a one degree rise in temperature for one day can lead to a 2 per cent drop in power demand and a 5 per cent drop in gas usage. Now those industries protect themselves by "buying" a warm winter in advance.

Weather derivatives ensure a pay-out regardless of how badly a business is hit. With weather insurance, a company has to prove and account for the damage done. The derivatives also protect against more long-term weather issues. In the leisure industry, bars that thrive in warm summer evenings can hedge themselves against a wet August. Hotels can protect against weather keeping visitors away.

Retailers are also known to be interested. Last Christmas, horrendous weather helped keep shoppers from London, and shops including Selfridges and John Lewis suffered. At Harvey Nichols' last set of financial results, it blamed slacker business on a flood in Knightsbridge.

In Japan, a flower-show organiser bought a £1m-a-day weather derivative to hedge against high winds blowing the heads off his flowers.