The weather-dependent nature of solar power makes Solar Power Producers
susceptible to the unpredictability of sunshine. Temperature-based
weather derivatives have recently emerged as an effective volumetric
risk cross-hedge for Solar Power Producers, given that temperature
positively correlates with solar radiation. Temperature-based put and
call options, mostly traded on organized exchanges, require users to pay
premiums that are costly and difficult to price. Swap contracts can
serve as an economical alternative since they do not require premiums.
However, they are only traded over-the-counter and are thus illiquid and
liable to counterparty credit risks. For these reasons, a novel
blockchain temperature-based weather derivative swap marketplace is
proposed that mitigates the risks inherent in traditional swap
contracts. The payoff structure and governing mechanisms of the smart
contract that underpins this instrument are also developed. A
preliminary investigation of this new financial instrument shows its
efficacy in hedging volumetric risks of Solar Power Producers.