PRODUCTS OVERVIEW

Galileo sells financial contracts, or weather and weather-related derivatives that settle based on indices comprised of weather variables that are measured and reported daily by government meteorological agencies around the world and commodity prices published by exchanges and other independent firms. Weather indices can be based on temperature, precipitation, snowfall, windspeed and sunshine hours amongst other weather variables, as well as combinations of these. Commodity indices can be based on energy prices, such as natural gas and power, or a wide variety of agricultural prices, such as corn, wheat and cotton. Contracts can range in duration from several days to several years and cover exposures well in excess of $100 million or the equivalent in major world currencies.

Some examples of popular weather indices are shown below:



Weather-contingent commodity contracts pay off based on scenarios defined by both weather which drives volume and commodity prices. An example can be seen in the following graphic, which outlines the four possible scenarios arising from volume (weather) and commodity price variability.

Weather derivatives are designed to pay out if the settlement index moves beyond a pre-specified point, or strike. There are two general classes of products:

• Index Guarantees: These contracts provide coverage against index moves beyond the strike in exchange for a premium. Contracts that pay out when the index rises are called calls, and contracts that pay out when the index falls are called puts (see below).
• Index Exchanges: As with Index Guarantees, these contracts provide coverage against index moves beyond the strike except that instead of paying a premium, Galileo's counterparty covers Galileo against an opposite move in the index. Index Exchange contracts where Galileo pays on one side of the strike and gets paid on the other are called swaps. Index Exchange contracts that have an index range where no payments are made are called collars.

Each financial product sold by Galileo can be described by a set of definitions that detail how the product works in terms of payout characteristics:

• Location: To which city or cities will the weather be indexed? These locations are usually airport weather stations administered by government meteorological organizations.
• Index: What is the actual index off of which the product will settle? This usually involves counting up daily measurements of a weather variable(s) over a period of time and organizing them in a way which represents the cash flows of the client.
• Period: What is the calculation period for the index? The majority of weather derivatives are monthly or seasonal in nature but can be easily designed to be shorter or longer.
• Notional: What is the payout rate per index unit beyond the strike? This amount is highly flexible and is usually linked to the underlying weather exposure being hedged.
• Limit: What is the maximum amount that can be paid out under the contract? This is often set as the maximum historical payout but can be higher or lower.
• Type: Is the product a put, call, swap, collar or other structure which may be a combination of these?
• Strike: At which index point(s) will the product begin to pay out? The strike can be set either close to "normal" weather or at a more extreme point depending on the requirements of the client and the level of risk that they would like to cover or retain.

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