Up until now we have looked exclusively at individual weather contracts, and how to model and price them on a stand-alone basis. However, we saw in chapter 3 that, from a speculator's point of view, individual weather contracts are very risky investments. For swaps there is around a 50 per cent chance of losing money while for short options there is typically a 20 per cent to 40 per cent chance, depending on the location of the strike. The addition of risk loading can make these risks a little less severe, but these are still worse risks than even the lowest-rated junk bonds.

There are two ways that speculators can overcome this problem and use weather derivatives to have a favourable impact on their overall levels of risk and return. The first is to view the weather derivative business as part of a larger enterprise. Although the weather business on its own might have a large risk relative to return, it could be that the marginal contribution to the total risk and return of the whole business makes it a good investment. This is possible because of the lack of correlation between weather events and other forms of investment.