Hedging by using weather derivatives in winter ski tourism

Abstract

Tourism, as one of the main driving forces of economic development, is exposed to many risks. Besides frequent fluctuations in foreign currency exchange, prices of fuel and transportation, the tourism industry has become more sensitive to weather conditions lately. One of the new instruments which can be efficiently used for weather risk hedging is weather derivatives (forwards, futures, options and swaps on chosen weather variables-temperature, rain, snow, wind etc.). In this paper, we will present the possibility of weather derivatives application in winter tourism-snowfall forwards-in order to hedge the business of ski lift operator company. Our research is based on snowfall data of Kopaonik mountain ski resortand revenues of ski lift operator company. We will show that weather derivatives might be an effective tool for hedging weather risk and reducing the volatility of companies'revenues in the winter ski tourism business in Serbia.