Managing Snow Risks: The Case of City Governments and Ski Resorts

Abstract

This article studies the impact of weather conditions on the financial performance of ski resorts and local governments and proposes a hedging mechanism to manage the exposure. We analyze a unique ski resorts visitor data set. Our analysis shows that maximum snow depth has an inverted-U shaped relationship in regard to the number of visitors to ski resorts while the snow fall has a significantly adverse impact on the profit to the city government. We then design a hedging mechanism for this risk exposure and examine its contribution to the corporate value of the ski resorts and city government. In particular, we use the Wang transform model to incorporate the decision makers’ risk preferences in the evaluation of the snow derivatives. We find that the proposed snow derivatives contribute significantly to ski resorts value if the safety loading offered would be 5%-10%. This low safety loading might be possible contracting by the over-the-counter trade between two parties on which risks concerned have opposite impacts.