Two Below Zero is a new ski resort in Colorado.Two Below Zero is concerned that an abnormally warm winter will prevent the accumulation of snow needed to have a profitable ski season.Two Below Zero purchased a contract that will pay Two Below Zero a lump sum payment if the daily high temperature exceeds 30 degrees for more than 12 days between January 1st and March 31st.The contract Two Below Zero purchased is called a(n)
A)catastrophe bond.
B)weather derivative.
C)interest rate swap.
D)convertible bond.

Question

Quizplus · Accepted Answer

The contract purchased by Two Below Zero is a weather derivative, which is a financial instrument that allows companies to hedge against weather-related risks. In this case, the derivative provides a lump sum payment if the temperature exceeds a certain threshold for a specified number of days, which helps mitigate the financial risk of a warm winter and less snow accumulation. A catastrophe bond is a type of insurance-linked security that pays out in the event of a natural disaster, and would not be applicable in this scenario. An interest rate swap is a financial contract where two parties agree to exchange interest rate payments, and a convertible bond is a type of bond that can be converted into a specified number of shares of stock in the issuing company. Neither of these would be relevant to Two Below Zero's situation.

Two Below Zero Is a New Ski Resort in Colorado