in the historical time series of the index. A more sophisticated approach is to incorporate some physical intuition/relationships into our statistical models based on spatial and temporal correlation between weather occurring in various parts of the ocean-atmosphere system around the world (for example, we can incorporate the effects of El Niño on temperatures and rainfall). Physical models of the weather We can utilize the output of numerical weather prediction models based on physical equations describing relationships in the weather system. Their predictive power tends to be less than, or similar to, purely statistical models beyond time horizons of 10–15 days. Ensemble forecasts are especially appropriate for weather derivative pricing within the contract period of a monthly temperature derivative. However, individual members of the ensemble need to be 'dressed' (for example, with Gaussian kernels estimated from historical performance) before a reasonable probabilistic forecast can be obtained. Mixture of statistical and physical models A superior approach for modelling daily or monthly weather variable time series is to combine statistical and physical weather models using time-horizon varying weight which are obtained after optimization of those based on historical out-of-sample evaluation of the combined model scheme performance. Accounting treatment In contrast to a weather insurance policy and because of its unique nature, the accounting for a weather derivative falls under specialized rules, most notably the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards #133 (SFAS #133). Because of this rigorous accounting and taxations treatment. any party considering the transaction of a weather derivative should seek the advice of both an accountant familiar with SFAS #133 and the required documentation, as well as a tax attorney. Further reading Considine, G., 2000, "Introduction to Weather Derivatives", Weather Derivatives Group, Aquila Energy. Peter Robison, "Hedge Funds Pluck Money From Air in $19 Billion Weather Gamble", Bloomberg News, August 2, 2007. USA Today (2008), "Weather Derivatives becoming hot commodities", USA Today Online posted 6/9/2008. Alice Gomstyn, Rich Blake and Dalia Fahmy, "Want a Weather Forecast? Ask Wall Street" ABC News, February 8, 2010. Dischel, R. S., Ed. (2002). "Climate Risk and the Weather Market: Financial Risk Management with Weather Hedges" , Risk Books. Jewson, S., A. Brix and C. Ziehmann (2005). "Weather Derivatives Valuation: The Meteorological, Statistical, Financial and Mathematical Foundations". Cambridge, Cambridge University Press. Golden, L. L., M. Wang and C. C. Yang "Handling Weather Related Risks Through the Financial Markets: Considerations of Credit Risk,