Companies use such products when catastrophic insurance policies don't cover losses from certain kinds of weather, such as hurricanes, earthquakes, volcanic eruptions and fires caused by drought.  

Some companies are even making weather risk part of their marketing. CelsiusPro AG, a weather risk management firm, and Switzerland camera maker Nikon recently hatched a promotion using rainfall data to offer camera buyers in Switzerland a refund for certain periods when the weather turns bad. 

Weather risk management tools came into use in the late 1990s. Energy companies and utilities were early adopters and remain major users. Now, forward-looking companies in other sectors such as retail, construction, agriculture, transportation and leisure are also increasingly taking up the cudgel against Mother Nature's furies, using derivatives and recording the results for the shareholders' benefit.

For example, Washington Gas Energy, a subsidiary of WGL Holdings in Washington, D.C., derives a significant portion of its revenues from natural gas it delivers to residential and commercial heating customers during the winter heating season. According to its annual reports, the company received more in payments from weather derivatives than what it spent in premiums in two of the last three years. During fiscal 2008, it received a benefit of $4.6 million (pretax) from its weather insurance (against a cost of $3.4 million in premiums) after facing warmer-than-normal weather, and in fiscal 2010, Washington Gas made $1.3 million over and above what it paid out in premiums.

Meanwhile, Alliant Energy Corp., a public utility holding company based in Madison, Wis., showed in its fiscal 2010 annual report an estimated $1.38 per share of higher revenues "from changes in sales due to weather and impacts of 2009 hedges."

On some occasions, weather-risk protection can pay off in big, unexpected ways. Last winter, one fortunate client of Jeff Hodgson, president of the Chicago Weather Brokerage, reaped a whopping 261% gain on a snowfall trade. 

Hodgson primarily deploys his strategies using the CME Group (formerly known as the Chicago Mercantile Exchange). "The trade protected the client from excessively high snowfall, which was the case last winter when Chicago experienced cumulative snowfall in excess of 57 inches, more than 50% over the ten-year average of approximately 38 inches," he says.

In only the third year of trading, volumes in snowfall and options at the CME Group have increased more than 400%, according to Hodgson. 

The market works this way: Farmers, energy sellers, amusement parks and travel companies want to off-load weather risk inherent in their companies. Energy seller Con Ed, for example, is looking to protect itself against a cool summer. Weather brokers quantify the financial impact that cool or hot summer temperatures would have. They take on the risk and sell to counterparties who think it will be a sizzling summer. 

Such financial products can smooth out the peaks and troughs of company revenues. For example, an energy supplier that would lose money in a cool summer can swap that risk with a company that would consume more electric power for cooling buildings when the weather is hot.