Finance

2013 Dec. 04

[University of Macau]

CASE STUDY

Enron Corporation’s Weather Derivatives (A)

BB006039 YIN YANGYISU (Sugar)

bb006588 duan shuting (karen)

bb004961 yao yingying (joey)

bb006826 zhang yinan (june)

bb006201 xu youtian (Sky)

BB006039 YIN YANGYISU (Sugar)

bb006588 duan shuting (karen)

bb004961 yao yingying (joey)

bb006826 zhang yinan (june)

2013 Dec. 04

[University of Macau]

CASE STUDY

Enron Corporation’s Weather Derivatives (A)

BB006039 YIN YANGYISU (Sugar)

bb006588 duan shuting (karen)

bb004961 yao yingying (joey)

bb006826 zhang yinan (june)

bb006201 xu youtian (Sky)

BB006039 YIN YANGYISU (Sugar)

bb006588 duan shuting (karen)

bb004961 yao yingying (joey)

bb006826 zhang yinan (june)

There are several pros of weather protection from PNW’s perspective. To start with, it will protect against fluctuations in weather deviation. As we know, there a great deal of weather’s uncertainties which cause the unstable deviation that can be solved by the weather-derivatives through providing protection against the deviation of actual cumulative degree-days from an established threshold. Moreover it can guarantee steady revenue. PNW’s revenues were extremely sensitive to weather conditions, which can be eliminated by weather protection through requiring a rather sizable up-front premium. Furthermore, it can protect earnings from unseasonably warm weather which had accounted for about two-thirds of the firm’s underperformance in earnings in past four years. Weather protection can reduce the warmer weather than average which leads to the volume risk for PNW. However, there are also a few cons of weather protection. The most crucial one is that the cost of weather protection will be undervalued by the adjustment of weather data for historical trend or else. In other word, compared to not adapting the weather production, the cost of using weather protection will be higher, which brings a worse negative...