CandleFocus Glossary Editor
Weather futures are a form of financial derivative contract that allow traders to hedge or speculate on the future weather conditions. The payoff from weather futures depends on the aggregate difference of the recorded temperature, usually measured in HDD (heating degree-day) and/or CDD (cooling degree-day), for an agreed on date in the future.
Weather futures originated in the early 1990s when companies began looking for methods to hedge their weather exposure. Weather futures are the perfect risk management tool for companies that are affected by changes in climate patterns or extreme weather events. By enrolling in a weather futures contract, companies are enabled to minimize losses during unexpected weather changes and they can protect their profits.
Weather futures are either offered directly through a broker or through energy exchanges such as CME Group, EEX, and Nasdaq Commodities. They are regularly used by energy companies, utilities, companies in transportation and related sectors, as well as agricultural producers. Most of them use weather futures to hedge their earnings and reduce risks associated with changing weather patterns.
Weather futures are highly cost effective and offer more flexibility than options. A big plus of weather derivatives is the lack of an upfront payment. The cost of a weather futures contract usually ranges from $50 to $2000 and is based on several factors such as the time of the year, the region being hedged, and the duration of the meteorological contract.
In conclusion, weather futures offer a wide range of possibilities for businesses to protect themselves from losses due to unexpected shifts in climate. They enable companies to remain profitable even when faced with dramatic weather changes that can cause losses. Weather futures are a great risk management tool and they are becoming increasingly popular with businesses seeking to protect their financial well-being during uncertain weather conditions.
Weather futures originated in the early 1990s when companies began looking for methods to hedge their weather exposure. Weather futures are the perfect risk management tool for companies that are affected by changes in climate patterns or extreme weather events. By enrolling in a weather futures contract, companies are enabled to minimize losses during unexpected weather changes and they can protect their profits.
Weather futures are either offered directly through a broker or through energy exchanges such as CME Group, EEX, and Nasdaq Commodities. They are regularly used by energy companies, utilities, companies in transportation and related sectors, as well as agricultural producers. Most of them use weather futures to hedge their earnings and reduce risks associated with changing weather patterns.
Weather futures are highly cost effective and offer more flexibility than options. A big plus of weather derivatives is the lack of an upfront payment. The cost of a weather futures contract usually ranges from $50 to $2000 and is based on several factors such as the time of the year, the region being hedged, and the duration of the meteorological contract.
In conclusion, weather futures offer a wide range of possibilities for businesses to protect themselves from losses due to unexpected shifts in climate. They enable companies to remain profitable even when faced with dramatic weather changes that can cause losses. Weather futures are a great risk management tool and they are becoming increasingly popular with businesses seeking to protect their financial well-being during uncertain weather conditions.