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

Question

Quizplus · Accepted Answer

The contract that Five Below Zero purchased is a form of a weather option, as it provides protection against adverse weather conditions. A catastrophe bond, on the other hand, is a type of insurance-linked security that transfers the risk of a particular catastrophe event to investors. Interest rate swap and convertible bonds are both financial instruments that are unrelated to weather risk management.

Five Below Zero Is a New Ski Resort in Colorado