Model risk in the pricing of weather derivatives

he market for weather derivatives was launched by investment banks, insurance companies and utilities in the late 90's. Most of the contracts are OTC though some can be traded on Future Exchanges (CME, LIFFE-Euronext). These products provide protection against losses due to non-catastrophic climatic events. End-users are, mostly, energy companies but also theme parks, breweries, winter shipment manufacturers, leisure resorts, fertiliser manufacturers? The underlying climatic risks are measured by means of indexes built from available meteorological data. On exchanges, weather contracts are based on temperature. Indexes are monthly and seasonally means of daily average temperatures (LIFFE-Euronext), or monthly Heating Degree-Day (HDD) and Cooling Degree-Day (CDD) indexes (...)