Weather derivatives

Weather derivatives are like making a bet on what the weather is going to be like. Imagine you and your friends are outside playing and it's really hot. You might say to your friend "I bet it's going to be even hotter tomorrow!" That's kind of like a weather derivative.

In the real world, businesses use weather derivatives to protect themselves from bad weather. For example, a farmer might use a weather derivative to protect themselves from a drought. They might make a bet that if there's not enough rain, they'll get money to help them keep their farms going. Similarly, a ski resort might make a bet that if it doesn't snow enough, they'll get money to keep their business going.

So weather derivatives are like bets that people and companies make to protect themselves from bad weather.