LIANE HANSEN, host:
Cold weather in January is not news, but the first half of this month saw record-breaking low temperatures from the northern plains to Miami, the exceptional cold and icy conditions for truckers, orange growers, restaurant workers and so many others. The second half of the month brought intense winter storms to the West Coast.
But business owners don't have to take what Mother Nature dishes out anymore. Now they can turn to financial markets for help. Here to explain is senior business editor Marilyn Geewax. Welcome back, Marilyn.
MARILYN GEEWAX: Good morning, Liane.
HANSEN: All right, explain: How can financial markets help businesses cope with something as unpredictable as the weather?
GEEWAX: Well, you know, in the financial world people realize that business owners have to offset the economic impact of bad weather. So, think about how important that is. The Commerce Department says one-third of all our economic activity in this country has a direct link to the weather. We're talking about theme parks and utility companies, airlines. They all have this huge stake. And, of course, farmers have the biggest stake of all.
So, all of these business owners are looking for ways to - and they're willing to spend money to find ways to offset their risks. And we used to do that just simply through insurance. When you think about Lloyd's of London, that was more than 300 years ago they started helping merchants and ship owners to make sure that if your ship didn't come in, at least you didn't lose everything 'cause you had insurance.
So, the securities traders, they thought about this insurance and they wanted to take it up a notch. They thought of something a little bit more sophisticated. And about 20 years ago they created something called weather derivatives.
HANSEN: Weather derivatives. I mean, financial derivatives is a phrase we heard a lot during the market chaos in late 2008, but what's a weather derivative?
GEEWAX: Well, these are futures contracts and options that allow the two parties to effectively bet on the weather. On the one side of a contract, there's someone who's willing to bet their money and hopefully profit if the weather is mild, and on the other side, there's somebody who would gain if the weather turns out to be terrible.
HANSEN: Give us an example of how it would work.
GEEWAX: Well, let's say you're running a theme park in Florida and you know that you're going to lose a lot of money if it turns out to be exceptionally cold. So, a theme park operator could hedge against really cold days in January by using a weather futures contract. Effectively, it works as a swap. There's one party that gets paid if a certain number of days are colder than a set point - let's say 40 degrees - and the other party gets paid if it turns out to be warmer than expected.
HANSEN: So, does this mean businesses really don't have to worry about the weather?
GEEWAX: Well, it means that business owners who are prudent and they hedge their risks with the help of these futures contracts, they can avoid the worst consequences of bad weather. But here's one other thing to ponder, that even if the smartest financial wizards, the insurance experts, they don't really know how to create any instruments to hedge against global warming.
If we really do have the worst of the predictions come true with lots of coastal areas getting flooded and all sorts of huge storms, no one will be able to come up with a financial instrument big enough to protect against that kind of change. But I was looking at the jobs outlooks and there is one thing that might be a safe bet: a private sector weather consultant seems to be an area of growth for jobs. So, maybe the thing to do here is just to learn to be a meteorologist.
HANSEN: NPR's senior business editor Marilyn Geewax. Thanks a lot.
GEEWAX: You're welcome, Liane.