Weather Risk and Financial Markets

Summary:   The course introduces students to the role that weather plays as a source of financial and operational risk for business, markets, and other institutions. It also introduces the tools and concepts for weather risk management-the insurance products, financial instruments, and decision tools that organizations use to manage, reduce, and transfer their weather-related risks. Major topics include: (i) The concept of risk and the role of weather as a driver of economic risk; (ii) Probabilistic approaches to weather forecasting with emphasis on business-relevant forecasts; (iii) Techniques for valuation of weather derivatives; (iv) Links between weather and markets for energy and agricultural commodities; and (v) Insurance and weather risks. The course emphasizes practical forecasting exercises, simulated commodities trading, and communications of weather risk to non-meteorologists.

David W. Titley
Office Hours: Tuesday / Thursday 3:30 pm – 5:00 pm, 523 Walker or by appointment
phone: 814.867.4750 

Teaching Assistant
Ms. Lily Campbell
Office Hours: Friday 1 – 3 pm, 416 Walker or by appointment

Pre-requisites:  METEO 411;E B F 472 or STAT 301 or STAT 401;E B F 301 or E B F 473

Students who do not meet these prerequisites after being informed in writing by the instructor may be dis-enrolled during the first 10-day free add-drop period according to Administrative Policy C-5. If you have not completed the listed prerequisites, then promptly consult with the instructor if you have not done so already. Students who re-enroll after being dis-enrolled according to this policy are in violation of Item 15 on the Student Code of Conduct.  Any questions on pre-requisites, please contact the instructor immediately.

Course Schedule: Class meets from 12:05-1:20pm on Tues/Thurs in Rm 110 Walker Bldg. Lab meets Wed/Fri 10:10-11am in Rm 007A Sparks Bldg.  

Recommended (not required) textbooks:

Wilkes, D.S., Statistical Methods in the Atmospheric Sciences, 3rd Ed. Academic Press, 2011.

McLean, B., The Smartest Guys in the Room:  The Amazing Rise and Scandalous Fall of Enron, 2004

Kleinman, G., Trading Commodities and Financial Futures, 4th Ed. FT Press, 2013.

Mlodinow, Leonard, The Drunkard’s Walk:  How Randomness Rules our Lives, Vintage Press, 2008.

The following book is on 2-hour (and overnight) reserve in the University Library System:

Robertson A. & Vitart, F. Sub-seasonal to Seasonal Prediction, 1st Edition:  The Gap Between Weather and Climate Forecasting, 2018.

Course Policies:

This capstone course in the Weather Risk option offers the student numerous opportunities to integrate their foundational knowledge of economics, statistics and the atmosphere to the practical challenges of making money in the market place. The semester-long trading projects provide a continuous learning experience where weather models and quantitative business analyses are used routinely to gain measurable skill in weather risk management.  Likewise, the various forecasting exercises are designed to expose students to a variety of medium range weather forecasting challenges they may reasonably encounter working in the weather risk field.  Here are the components (both for assessment and team work) of the class:

  1. Weekly trading meetings – starting with mechanics the week of 14 January.
  2. Twice-weekly Natural Gas Energy Demand Index (N-GEDI) forecasting contest starting 00Z 15 January.  The last forecast will be submitted on 00Z 09 April.  In January you will forecast a probability distribution of the 1 to 5-day cumulative degree-days at EWR, ORD, HOU and LAX.  The cities are weighted by the regional natural gas use in the northeast, Midwest, Texas and west coast, respectively.  The index is calibrated such that ‘100’ reflects the average of the past thirty year weighted climatology.  An index value greater than 100 reflects higher degree day accumulation; an index value less than 100 reflects lower degree day accumulation.  Starting 00Z 01 February, the forecast period will shift to 11-15 days, to reflect what energy traders are most interested in.  We will cover the details of this index and how to forecast it in week one. 
  3. Twice-weekly significant 48-hour wave height forecasting contest for the Gulf of Mexico at buoy location 44009 offshore Delaware Bay starting 00Z 15 January and ending 00Z 09 April.  You will determine the vessel best suited to do maintenance for the offshore wind farm in the vicinity of that buoy.  Details of this exercise will be provided in week one.
  4. Twice weekly high time resolution forecasts of 3-Hourly Winds for buoy 44009 (Delaware Bay) starting 00Z 15 February and ending with the forecast submitted on 00Z 10 April.  
  5. All the above forecasts will be submitted NLT Monday and Thursday evenings (00Z Tuesday and 00Z Friday).
  6. The first forecast in each of the above categories will be “Forecast Zero” and will be for practice only.  It will not count in your overall forecast standings.
  7. CAT Risk Exercise – an assessment of property risk of hurricanes.
  8. Midterm #2 is not comprehensive – it will only cover material after Midterm #1
  9. Extra Credit:  see below
  10. Class participation through attendance, small homeworks, short writing assignments, short verbal presentations in class, quizzes and active participation in lectures, labs and forecasting.
  11. Computers / laptops are discouraged in class. 15% of your grade is based on active participation in the class.  Checking on, and posting to, social media does not count as active participation.
  12. Guest lecture material is testable.


  • 30% Tests
    • 15% Mid-term #1
    • 15% Mid-term #2
  • 30% Forecasting Exercises
    • 10% N-GEDI
    • 10% Wind forecasts buoy 44009
    • 10% Offshore windfarm maintenance exercise
  • 25% Nat Gas or Power Trading Sessions
    • 10% Mentor Evaluation
    • 10% Written and oral presentation to Mentors & Class week 16
    • 5% Trading performance relative to market and classmates
  • 15% Participation (attendance, small homeworks, short writing assignments, short verbal presentations in class, quizzes and active participation)

Optional Extra Credit – (pick Project (1) or (2).  Only one will count for credit).  Up to 3 extra-credit points will be awarded to your final class score.

Project (1):  1000 – 1500 word review of Enron based on the recommended book “The Smartest Guys in the Room” (there is also a movie by the same name).  Include an analysis of why Enron went bankrupt; what advances Enron brought to the Weather Risk field, and lessons learned for today’s weather risk traders.  


Project (2):  1000-1500 word review of “The Drunkards’ Walk”.  What are the lessons for weather risk traders in this book?  Do you agree with the author’s characterization of our ability to predict the future?  Why or why not? 

In addition…

For the N-GEDI and wind forecasting contests we run this semester, you will receive one extra credit point for beating the student consensus.

The student who finishes with the greatest balance in their nat gas trading account will receive one extra credit point.

The student who finishes with the greatest balance in their offshore wind account will receive one extra credit point.

The mentors will vote one student the “most courageous trader” – for greatest participation and efforts to fully embrace trading.  That student will receive two extra credit points.

Grading Policy:  In general, there will be no ‘curve’ applied to the overall grades.  However, the class average for the final grades will be no lower than a 3.0 (on a scale of 4.0).

Forecasts will be graded in the following manner:

At or above Consensus:  “A”

At or above NWS/WSI/MOS/Accu-Weather/Objective Guidance:  “B”

At or above Climatology:  “C”

Academic Integrity

Students in this class are expected to write up their problem sets individually, to work the exams on their own, (and for the extra credit section) to write their papers in their own words using proper citations. Class members may work on the problem sets in groups, but then each student must write up the answers separately. Students are not to copy problem or exam answers from another person's paper and present them as their own; students may not plagiarize text from papers or websites written by others. Students who present other people's work as their own will receive at least a 0 on the assignment and may receive an F or XF in the course. Please see the Earth and Mineral Sciences Academic Integrity Policy, which this course adopts.

To learn more, see Penn State's "Plagiarism Tutorial for Students."

Course Copyright

All course materials students receive or to which students have online access are protected by copyright laws. Students may use course materials and make copies for their own use as needed, but unauthorized distribution and/or uploading of materials without the instructor’s express permission is strictly prohibited. University Policy AD 40, the University Policy Recording of Classroom Activities and Note Taking Services addresses this issue. Students who engage in the unauthorized distribution of copyrighted materials may be held in violation of the University’s Code of Conduct, and/or liable under Federal and State laws.

Accommodations for Students with Disabilities

Penn State welcomes students with disabilities into the University's educational programs. Every Penn State campus has an office for students with disabilities. The Office for Disability Services (ODS) website provides contact information for every Penn State campus. For further information, please visit the Office for Disability Services website. In order to receive consideration for reasonable accommodations, you must contact the appropriate disability services office at the campus where you are officially enrolled, participate in an intake interview, and provide documentation based on the documentation guidelines. If the documentation supports your request for reasonable accommodations, your campus’s disability services office will provide you with an accommodation letter. Please share this letter with your instructors and discuss the accommodations with them as early in your courses as possible. You must follow this process for every semester that you request accommodations.


This course abides by the Penn State Attendance Policy E-11 and Conflict Exam Policy 44-35. Please also see Illness Verification Policy, and Religious Observance Policy. Students who miss class for legitimate reasons will be given a reasonable opportunity to make up missed work, including exams and quizzes. Students are not required to secure the signature of medical personnel in the case of illness or injury and should use their best judgment on whether they are well enough to attend class or not; the University Health Center will not provide medical verification for minor illnesses or injuries. Other legitimate reasons for missing class include religious observance, family emergencies, and regularly scheduled university-approved curricular or extracurricular activities. Students who encounter serious family, health, or personal situations that result in extended absences should contact the Office of Student and Family Services for help. Whenever possible, students participating in University-approved activities should submit to the instructor a Class Absence Form available from the Registrar's Office, at least one week prior to the activity.

Weather Delays

Campus emergencies, including weather delays, are announced on Penn State News and communicated to cell phones, email, the Penn State Facebook page, and Twitter via PSUAlert (Sign up at:

Penn State E-mail Accounts, Learning Management System and Social Media

All official communications from Penn State are sent to students' Penn State e-mail accounts. Be sure to check your Penn State account regularly, or forward your Penn State e-mail to your preferred e-mail account, so you don't miss any important information.

You will require a Facebook account to participate in the Commodity Trading portion of this course.  See the instructor immediately if you do not have a Facebook account.

Deferred Grades

If you are prevented from completing this course within the prescribed amount of time, it is possible to have the grade deferred with the concurrence of the instructor. To seek a deferred grade, you must submit a written request (by e-mail or U.S. post) to your instructor describing the reason(s) for the request. It is up to your instructor to determine whether or not you will be permitted to receive a deferred grade. If, for any reason, the course work for the deferred grade is not complete by the assigned time, a grade of "F" will be automatically entered on your transcript.

Diversity, Inclusion, and Respect 

Penn State is “committed to creating an educational environment which is free from intolerance directed toward individuals or groups and strives to create and maintain an environment that fosters respect for others” as stated in Policy AD29 Statement on Intolerance. All members of this class are expected to contribute to a respectful, welcoming and inclusive environment and to interact with civility. 

For additional information, see:

Mandated Reporting Statement 

Penn State’s policies require me, as a faculty member, to share information about incidents of sex-based discrimination and harassment (discrimination, harassment, sexual harassment, sexual misconduct, dating violence, domestic violence, stalking, and retaliation) with Penn State’s Title IX coordinator or deputy coordinators, regardless of whether the incidents are stated to me in person or shared by students as part of their coursework.  For more information regarding the University's policies and procedures for responding to reports of sexual or gender-based harassment or misconduct, please visit

Additionally, I am required to make a report on any reasonable suspicion of child abuse in accordance with the Pennsylvania Child Protective Services Law.

Disclaimer Statement

Please note that the specifics of this Course Syllabus can be changed at any time, and you will be responsible for abiding by any such changes. Changes will be posted to the course discussion forum.

Week Date Lecture topic(s) Guest Lecturer / Notes 

  • Jan 8
    Intro and Course Objectives
    Forecasting Contests & Verifications
    N-GEDI Problem Set (Homework
  • 10 Jan   
    Risk Definition & Terminology
    Weather and Insurance I (Basics)
    Probability Review (Homework)
  • 15 Jan                   
    Weather and Insurance II (Indices and CAT Bonds)
    Forecast Zero Due 00Z 15 January
  • 16 Jan
    Commence Lab sessions (007A Sparks)
  • 17 Jan                   
    SCOR Reinsurance Guest Lecture (Chris Melhauser)
  • 22 Jan                   
    Market Analysis / Trading Basics / Market Terms
  • 24 Jan                   
    Options & Derivatives
  • 29 Jan                   
    Options & Derivatives (Review Problem Sets)
    Burn Analysis
  • 31 Jan                   
    Wx Data:  Quality Review & Scrubbing
  • 5 Feb                     
    Wx Data:  Manipulation
  • 7 Feb                     
    Forecast Process (markets and weather)
    Wind & Renewables / Wind Forecasting    
  • 12 Feb                 
    Wind Forecasting / MOS
  • 14 Feb                  
    Forecasting at Medium Range I
  • 19 Feb                  
    Forecast Zero for Buoy 44009 Wind/Power
  • 21 Feb                  
    Forecasting at Medium Range II  
  • 26 Feb                  
    Forecasting at Medium Range III  
  • 28 Feb                  
    Forecasting at Medium Range IV
  • 4-8 Mar Spring Break / No forecasting / Trading optional
  • 12 Mar                  
    Commodities and Weather Risk
  • 14 Mar                  
    Atmospheric & Ocean Indices / MJO / Teleconnections I
  • 19 Mar                  
    Atmospheric Indices / Teleconnections II
  • 21 Mar                  
    Decadal Oscillations / Teleconnections III
  • 26 Mar                  
    “Extended Range Statistical Forecasting” Dr. Steven Feldstein
  • 28 Mar
    Insurance / Cat Risk / Teleconnections Summary
  • 2 Apr 
    Forecast Verification
  • 4 Apr 
    Weather Risk applied to other Sectors
  • 9 Apr 
    Weather Risk:  Communicating Uncertainty to non-Scientists
  • 9 Apr
    Final Forecasts turned in (00Z 10 April)
  • 11 Apr                  
    Overview of NOAA Organization and Services
  • 12 Apr
    Trading Closes
  • 16 Apr
    Your value proposition
  • 17 Apr
    No Lab (prep time for presentation)
  • 18 Apr
    MIDTERM #2
  • 23 Apr
    Where Weather and Climate Meet -- Your Future 
  • 25 Apr
    Guest Critique – Constellation Energy (Business Casual)