Weather risk management in ski resorts: Financial hedging and geographical diversification

As weather volatility increases, weather risk has become a critical management issue in weather sensitive industries. This study uses ski resorts as an example to examine two promising weather risk management strategies: geographical diversification and financial hedging. The empirical analysis results suggest that financial hedging might be a more effective strategy for ski conglomerates. Guidelines for ski conglomerates to achieve better weather risk management outcomes are provided based on simulating the interactions between geographical diversification and financial hedging. Although based on ski resorts and snowfall risk, the methodology is also applicable to other weather sensitive hospitality businesses.

Research highlights▶ Ski conglomerates benefit more from financial hedging. ▶ A contract that covers only a quarter or even a month instead of the entire season is more effective. ▶ The correlations between snowfalls and between bases are more important than the cross-correlations between snowfalls and bases. ▶ The choice on the direction of correlations adjustment depends on the relative position of the actual correlation to the minimum HE point. ▶ Business diversification could improve the outcomes of financial hedging.