Weather Derivatives (WD) ( UPSC Prelims)

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News Context

India is set to introduce its first Weather Derivatives (WD), with the National Commodity and Derivatives Exchange Ltd (NCDEX) collaborating with the India Meteorological Department (IMD) to create rainfall-based derivative products.
      ○ This initiative aims to assist farmers and related sectors in hedging against risks such as irregular rainfall and heatwaves.
      ○ By utilizing both historical and real-time weather data from IMD, the program offers location-specific, seasonal contracts supported by statistically verified datasets.
      ○ Unlike traditional derivatives that are based on financial assets, WDs use meteorological parameters, such as rainfall and temperature, as the underlying asset, linked to a predefined weather index.
      ○ Since they lack inherent market value, WDs are considered part of an incomplete market.
      ○ On a global scale, over-the-counter trading in such products began in the 1990s.