Here is an example of a CWB Client using PUT options to protect their exposure.
Client A - Snow Removal Company
Location: Indianapolis, IN
Average Snowfall for January: 9"
Risk: Not enough Snow
Client A located in Indianapolis, IN was in need of CWB's services to help normalize their earnings regardless of the outcome of the weather for the winter season of 2012-2013. In order to fulfill this need, CWB analyzed the client's business structure, pinpointed the thresholds, and evaluated historical snowfall totals to best quantify a trade structure that aligned with their risk profile and earnings objective.
After careful analysis, CWB prepared a plan for Client A to execute that would help them remain profitable despite a low performing winter.
The trade that was presented is as follows:
At the end of January, the total snowfall was 2.4". This trade awarded Client A a total payout of $100,000 ($90,000 profit). Additionally, the client generated regular revenues from the snowfall that did fall, thus producing an operating profit of $70,000. In aggregate, Client A netted $160,000 in total profit through operations and their snowfall hedge.
By executing the requested structure put together by CWB, Client A was able to achieve over 105% of their average total monthly earnings, despite having received less than 30% of average monthly snowfall.