Come rain, come shine
TRADERS will bet on two drops of rain rolling down a windowpane, and the traders at Merrill Lynch, true to their instincts, are making a market in rain. This being Ameri- ca, it is now raining precipitation deriva- tives. These new wonders of financial engi- neering represent bets on how much rain or snow, measured in inches, will fall in one day. The idea is that they will appeal to the hydro-electric companies, which need rain or snow to help make their turbines go round. In a drought, their profits suffer, but they could insure against this by taking a dry bet on future precipitations. If it then poured with rain they would be happy to lose. These derivatives have been derived from degree-day swaps, which are not, as you might think, two university chancellors conferring D.Litt.s on each other, but a way of betting on the temperature, measured in degrees. These may find a market among manufacturers of summer dresses, but I think they are there to give Merrill's traders something to punt on other than the futures of their jobs, on which they were right to go short.
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