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Meaning / Definition of

Weather Derivative

Categories: Options,

A weather derivative is a futures contract - or options on that futures contract - where the underlying commodity is a weather index.These derivatives work much the same way that interest-rate or stock index futures and options do, by creating a tradable commodity out of something that is relatively intangible. Analysts look at historical weather patterns - temperature, rainfall and other things - develop averages, and quantify the risk that weather will deviate from the average. Corporations use weather derivatives to hedge their risk that bad weather will cause a financial loss. For a cereal company, bad weather might be a drought, which would cause wheat prices to go up. For a home heating company, it could be warm days in November, which could lower demand for home heating oil. And for an amusement park it could be rain.The cereal company and the amusement park might buy futures contracts with an underlying weather index based on rainfall. The home heating company might want contracts based on a temperature index.Weather derivatives are different from insurance, because they're linked to common weather events, like dry seasons, or a warm autumn, that affect particular businesses. Insurance is still required to protect against major weather events, like tornadoes, hurricanes, and floods.You can buy weather derivatives as an individual, but you'll want to consider the trading costs carefully to ensure that your risk of loss is worth the expense.

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Definition / Meaning of

EBIDTA

Categories: Accounting, Stocks, Fundamental Analysis,

earnings before interest, taxes, depreciation and amortization. An approximate measure of a company's operating cash flow based on data from the company's income statement. Calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization. This earnings measure is of particular interest in cases where companies have large amounts of fixed assets which are subject to heavy depreciation charges (such as manufacturing companies) or in the case where a company has a large amount of acquired intangible assets on its books and is thus subject to large amortization charges (such as a company that has purchased a brand or a company that has recently made a large acquisition). Since the distortionary accounting and financing effects on company earnings do not factor into EBIDTA, it is a good way of comparing companies within and across industries. This measure is also of interest to a company's creditors, since EBIDTA is essentially the income that a company has free for interest payments. In general, EBIDTA is a useful measure only for large companies with significant assets, and/or for companies with a significant amount of debt financing. It is rarely a useful measure for evaluating a small company with no significant loans. Sometimes also called EBITDA or operational cash flow.

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