RMS Expands Capability of Weather Risk Management Model

November 3, 2003

Newark Calif.-based Risk Management Solutions, a leading provider of products and services for the management of catastrophe risk, and Earth Satellite Corporation (EarthSat) announced two additions to the Climetrix™ weather derivatives trading and risk management system.

The bulletin described the new capabilities as “a new discontinuity detection service for a number of the most frequently traded stations in the weather market, and the addition of enhanced historical Canadian temperature data.”

The addition of these services illustrates RMS continued efforts to improve its data products, said the bulletin. It noted that “data collected at a weather station can be subject to problems caused by changes in various attributes of the station over time, such as movement of instruments from one location to another, upgrading and replacement of instruments, and changes in the immediate environment of the station.

“These changes can cause discontinuities in the measured values, and can make historical data unreliable for valuing weather derivatives that will be settled based on observations taken with current instrumentation. For weather derivative pricing and analysis, it is essential that these discontinuities are removed by adjusting historical temperature data so that it is consistent with current measurements.

“The Climetrix discontinuity detection service relies on continuous statistical analysis and improved metadata to monitor daily temperature data for the most commonly traded weather stations.”

Dave Whitehead, meteorological data manager at EarthSat noted: “The question of discontinuities in meteorological data has not gone away. Already in 2003 we have seen several stations that have been moved or changed, with significant impacts on the measured temperature data. Using this new technology, we are now able to detect these changes much more quickly than before. We are gradually rolling this new methodology out to cover the stations used in the secondary weather market.”

Canadian temperature data recently released by RMS and EarthSat also includes measures to lessen the effects of historical discontinuities. The bulletin noted that: “This dataset covers twelve weather stations and represents a major advancement in the quality of information that is available to global weather market participants who trade Canadian contracts. This release marks the first time that high quality historical temperature data has been made commercially available for Canadian locations. The results of the enhancement of the Canadian temperature data show that Canadian stations are just as prone to the problem of discontinuities as stations in the U.S.”

Jeff Hamlin, Climetrix client services manager commented: “On average we have identified twelve discontinuities per station. Some of these changes are large enough to lead to big differences in the prices that would be calculated for weather swaps and options. We hope that the availability of this data will give weather traders much more confidence in taking on Canadian risks, which in turn should lead to continued development of the global weather market.”

More information on Climetrix can be accessed at: http://www.climetrix.com/

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