Hedging Weather Risk in Nature-Based Tourism Business

Abstract

For nature-based tourism businesses, unpredictable weather patterns impose not only operational challenges but also financial costs. With the increasing volatility of weather patterns and the subsequent financial impacts, managing weather risks has become an essential component for increasing the company value of nature-based businesses, such as ski resorts. The primary objective of this study is to show that weather derivatives can effectively reduce the cash flow volatility of nature-based tourism businesses. Using a ski resort as an example, our Monte Carlo simulations reveal that snowfall forwards could reduce ski resorts’ cash flow volatility up to 25.8%. This hedging strategy is also applicable for other nature-based businesses, such as beach resorts and golf courses.