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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

Money Supply

Categories: Economics,

The money supply is the total amount of liquid or near-liquid assets in the economy. The federal reserve, or the Fed, manages the money supply, trying to prevent either recession or serious inflation by changing the amount of money in circulation. The Fed increases the money supply by buying government bonds in the open market, and decreases the supply by selling these securities.In addition, the Fed can adjust the reserves that banks must maintain, and increase or decrease the rate at which banks can borrow money. This fluctuation in rates gets passed along to consumers and investors as changes in short-term interest rates.The money supply is grouped into four classes of assets, called money aggregates. The narrowest, called M1, includes currency and checking deposits. M2 includes M1, plus assets in money market accounts and small time deposits. M3, also called broad money, includes M2, plus assets in large time deposits, eurodollars, and institution-only money market funds. The biggest group, L, includes M3, plus assets such as private holdings of us savings bonds, short-term us treasury bills, and commercial paper.

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