In a 1992 paper presented to the 5th International Meeting on Statistical Climatology (Stern, 1992), the author introduced a methodology for calculating the cost of protecting against the onset of global warming. The paper, 'The likelihood of climate change: A methodology to assess the risk and the appropriate defence', was presented to the meeting held in Toronto, Canada, under the auspices of the American Meteorological Society (AMS). In this first application of what later was to become known as 'weather derivatives', the methodology used options pricing theory from the financial markets to evaluate hedging and speculative instruments that may be applied to climate fluctuations.

Use of these financial instruments leads to those concerned being compensated provided they are on the correct side of the contract. Conversely, those on the wrong side of the contract would have to provide that compensation. The methodology provided a tool whereby the cost of the risk faced can be evaluated (whether it is the case of determining that risk on a global scale, or on a company specific scale). Published data from the Carbon Dioxide Information Analysis Center were used in the evaluation. Since the early 1990s, the global mean temperature has risen significantly, and the methodology was 'revisited' in a 2005 paper presented to the 16th Conference on Climate Variability and Change at the AMS Annual Meeting of that year (Stern, 2005), with a view to recalculating the cost taking into account the additional, more recent, data. It was shown that the cost of protection has, indeed, risen since 1992.

The current paper explores the application of some of these strategies on a shorter time scale - the management of business risks related to seasonal climate variability in the southeastern Australian State of Victoria. To this end, Wolter and Timlin (1993) developed the Multivariate ENSO Index (MEI) as a tool to monitor ENSO on various variables observed over the tropical Pacific, namely, sea-level pressure, surface wind, sea surface temperature, surface air temperature, and cloudiness. The MEI is computed for each of twelve sliding bi-monthly seasons. The paper reports upon statistical relationships between the MEI, and rainfall, minimum temperature, and maximum temperature, in various Victorian Districts during the three-month season following, and describes the components of a system that may be used to automatically generate the fair value of contracts that could be utilised by businesses whose earnings are sensitive to seasonal climate variability in the management of associated risks.

EXAMPLE

... FOR JUL/AUG/SEP (2008):

... Specifically for Melbourne, the fair value price of a contract to protect a business against an unusually dry season, whereby you are paid $10000 if the rainfall in the forthcoming JUL/AUG/SEP season is in Tercile One (less than 136.7 mm), is $3196

Also specifically for Melbourne, the fair value price of a contract to protect a business against an unusually wet season, whereby you are paid $10000 if the rainfall in the forthcoming JUL/AUG/SEP season is in Tercile Three (at least 171.8 mm), is $3557

Also specifically for Melbourne, the fair value price of a contract to protect a business against a season with unusually cool days, whereby you are paid $10000 if the mean maximum temperature in the forthcoming JUL/AUG/SEP season is in Tercile One (less than 15.0 °C), is $2083

Also specifically for Melbourne, the fair value price of a contract to protect a business against a season with unusually warm days, whereby you are paid $10000 if the mean maximum temperature in the forthcoming JUL/AUG/SEP season is in Tercile Three (at least 15.6 °C), is $5636

Also specifically for Melbourne, the fair value price of a contract to protect a business against a season with unusually cool nights, whereby you are paid $10000 if the mean minimum temperature in the forthcoming JUL/AUG/SEP season is in Tercile One (less than 7.2 °C), is $1061

Also specifically for Melbourne, the fair value price of a contract to protect a business against a season with unusually warm nights, whereby you are paid $10000 if the mean minimum temperature in the forthcoming JUL/AUG/SEP season is in Tercile Three (at least 7.7 °C), is $6497