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UBS Newsletter for Banks and Financial Institutions Winter 2007News for Banks                                        The m...
SolutionsGetting a grip on climate riskA new index lets investors express their views on how fast the planet is warming   ...
Get together                                                to get ahead.                                          The Ban...
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News For Banks - October 2007 - UBS Global Warming Index - Weather derivatives - ilija Murisic


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News For Banks - October 2007 - UBS Global Warming Index - Weather derivatives - ilija Murisic

Keywords: auction, CDD, CME, derivatives, futures, global warming, HDD, ilija murisic, Index, UBS, UBS Global Warming Index, Weather

Published in: Economy & Finance, Technology
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News For Banks - October 2007 - UBS Global Warming Index - Weather derivatives - ilija Murisic

  1. 1. UBS Newsletter for Banks and Financial Institutions Winter 2007News for Banks The moment of truth The financial industry continues to often did not match those needs and change. Top-quality products, keen pricing, goals. Our response: UBS put a systematic convenient access and flawless execution advisory process in place and adopted are taken for granted. Increasingly, banks other best practices throughout the firm will differentiate themselves on the quality (see article on page 6). We also use tech- of their relationships with clients. This is nology to help our client-facing colleagues a lesson that other service industries have deliver what we now call the UBS Client long since taken to heart and now it’s our Experience (page 8). turn. Banks, UBS among them, are learn- The ultimate aim is to improve all pos- ing to think about how best to deliver their sible touchpoints so that clients receive services so that they stand out in a highly consistent, favorable experiences at UBS competitive marketplace. during those all-important “moments of And so they should. In the next few truth.” Anecdotal evidence, as well as pages, our guest contributors from McKin- studies and surveys, show that the new sey describe how huge performance gaps approach delivers tangible results, reinforc- between branches of the same bank were ing our belief that delivering compelling2 Moments of truth reflected in corresponding differences in client experiences leads directly to positive Why it pays to improve the client customer loyalty. Strong branches, a study outcomes for shareholders. experience and how to do it found, were able to turn bad experiences6 Four steps to fill a gap into positive ones by solving problems Spreading the client experience effectively and giving client needs greater message priority over their own branch sales goals. Tom Naratil8 Supporting the experience Greater client loyalty translated directly Head of Marketing Strategy & Development Technology for client advisors into a larger share of wallet. UBS Global Wealth Management & Business Banking9 Strict scrutiny Organizations that excel at client service The boons of broker review systems earn trust and loyalty during “moments of10 Gaining momentum truth,” which are crucial opportunities to Conferences in retrospect provide advice to clients about their per-12 The case for multi-asset cores sonal and investment lives. How effective- Diversifying for peace of mind ly those interactions are handled shape the14 Climate risk client’s long-term view of the organiza- New index on global warming tion. As a result, the McKinsey researchers15 In brief conclude that banks should pay greater News from around the world attention to the emotional factors underly- ing bank-client relationships. We at UBS came to a similar conclusion after a thorough review of our wealth management business. When we asked clients worldwide what they really wanted, the answers were clear. Our clients told us that banks frequently fail to take the time to understand their needs and goals. That, in turn, meant that products and solutions
  2. 2. SolutionsGetting a grip on climate riskA new index lets investors express their views on how fast the planet is warming cities – including New York, Chicago, Atlanta, and Las Vegas – that are most actively traded on the CME’s weather derivatives exchange. Between May 2 and September 3 this year, an excess temper- ature of 0.68ºF on these contracts caused the index to climb by almost 35%. This performance showed minimal correlation with any other investible asset class, a fact that could make the climate an interesting candidate for inclusion in otherwise tra- ditional portfolios. Access to the index would be via structured products, perhaps in combination with other types of asset. More cities could potentially be included in the index. The CME currently trades weather derivative contracts for 18 US and nine European cities, as well as six Cana- dian and two Japanese locations. To be eligible for inclusion in the GWI, however, the volume of futures traded for any given city must represent 1% or more of the total weather derivatives contracts tradedA broader swathe of investors can now give climate derivatives a whirl on the CME. Provided they meet this con- dition, European and Asian cities are likely to be included in the GWI over the me-Weather derivatives have been traded Bank to come up with the world’s first dium term. A UBS-GWI governance com-for the best part of a decade. In theory, ski index that tracks temperatures on a mittee will meet annually to determineresorts could use them to hedge against national and regional rather than a local the composition and the weighting of thewarm winters or brewers to protect them- basis. Launched in April this year, the UBS UGWI index and its family of sub-indices,selves against cool summers. In practice, Global Warming Index (UBS-GWI) is a trad- which currently covers four US regions: thethough, most users are in the energy sec- able benchmark for global investments in Northeast, Midwest, West and South.tor. The Chicago Mercantile Exchange the weather derivatives market. It provides Although there has been a dramatic in-(CME) established a weather derivatives a rational and simple way to obtain finan- crease in weather derivatives volumes overexchange for temperature contracts ref- cial exposure to large-scale trends in the the course of the last few years, tradederenced to certain US cities in September climate. The index should also prove useful products using weather remain inacces-1999, later adding European and Asian to industries that need to hedge against sible to the vast majority of the financialreferences. More recently, the CME has damaging climatic trends. Potential users community. Used mainly as a hedging in-added contracts on snowfall, frost and could include many branches of agricul- strument by energy, insurance and com-hurricanes. These innovations helped lift ture, tourism and construction. modity professionals, weather derivativestotal CME turnover in weather contracts remain largely untouched as an assetto some $45 billion in 2005 –2006. This How it works class in their own right. UBS’s new Globalsuccess has attracted attention elsewhere. The UBS-GWI is based on existing CME Warming Index could change that by pro-In mid-2006, China’s Dalian Commodities weather futures contracts that settle on viding a simpler way for a broader rangeExchange announced that it planned to the difference between the average daily of institutional and private investors tostart trading weather futures, with the aim temperature and a base temperature of gain financial exposure to global tempera-of helping Chinese farmers hedge their 65ºF. These are Heating Degree Day (HDD) ture trends.exposure to bad weather. and Cooling Degree Day (CDD) contracts, Weather, though, is not climate. As cli- so-called because they measure how far it Ilija Murisic UBS Investment Bank,matologists like to say, weather is what is necessary to heat or cool buildings in the Non-standard derivative productsyou get while climate is what you expect. prevailing weather conditions. At present, ilija.murisic@ubs.comThis insight prompted UBS Investment the index comprises contracts on the 15 US14 UBS News for Banks / Winter 2007
  3. 3. Get together to get ahead. The Bank for Banks. This environmentally friendly paper has been produced from pulp bleached entirely without chlorine. Printed in Switzerland. November 2007. 82319E-0704 © UBS 2007. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. When you team up with one of the world’s leading service providers for financial institutions, you profit from excellent front-to-back expertise for all your banking business, allowing you to optimize your entire value chain. We leverage our global capabilities to reduce your risk and costs and add greater scale and scope to your services, whether cash, currency, securities services, asset management, private banking, corporate finance or trade & export finance. Our dedicated specialists will deliver customized solutions to serve your needs. So you can concentrate on your core competencies while benefiting from the cutting-edge resources of a global powerhouse. You & Us. For further information call +41-44-239 80 08 or visit You & UsCertain products and services may not be available to residents of certain jurisdictions. Please consult the restrictions relating to the specific product or service for further information. Issued andapproved by UBS AG. Services offered in the UK are regulated by the FSA. Services offered from Switzerland are regulated by the SBC. © UBS 2007. All rights reserved.