CME Group weather products

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CME Group has been an innovator of market products and one of the exchange's latest contributions is weather products. The products are based on actual weather conditions or events. These conditions can change frequently and have a direct effect on a company's revenue. In addition, a weather event, like a hurricane, can impact an entire region and cause dramatic economic losses. Weather conditions tend to affect volume and usage more than they affect price, but in the end, price is affected. A few examples:

  • A warm winter can mean excess supplies of oil or natural gas for utility and energy companies.
  • Low snowfall and warm temperatures can reduce profits at ski resorts.
  • Cold summers can mean empty hotel rooms and empty airline seats.

Products and Services

The CME Group weather products include standardized futures and options. All weather futures products are listed on Globex. In addition, CME collaborates with the over-the-counter participants to enable the OTC community to trade all futures and options products via block trades, or privately negotiated and individualized agreements made by two parties and cleared through the CME Group clearing house.

  • OTC Weather Trading at CME Group

No weather option products are traded on Globex. Instead, all option products list a range of strikes that are available and as each trade is completed, they are listed and cleared on the same day. This eliminates the CME needing to list millions of strike prices but enable market participants to create dynamic structured products. Also, a futures product can be block traded using the same procedure. A good example of OTC Weather trading is the CME Group Hurricane products. [1]

  • How Weather Is Traded at CME Group

CME Weather products quantify weather in terms of how much temperatures, frost or snowfall deviate from the monthly or seasonal average in a particular city. The variations are geared to specific indexes, with a dollar amount attached to each index point. For example, summer weather is measured in terms of temperatures that exceed a base of 65 degrees Fahrenheit (18 degrees Celsius in Europe) and referenced to a Cooling Degree Day (CDD) Index. Winter weather is measured in terms of how much temperatures are below 65 degrees and referenced to a Heating Degree Day (HDD) Index. [2]

CME Group Weather Contracts[3]

Temperature

Hurricane

Weekly

Frost

Snowfall

  • Rainfall Futures and Options

The CME Group announced on October 14, 2010 that it would begin listing and trading rainfall futures, options on futures and binary options beginning October 31 for trade date November 1. The monthly and seasonal contracts will be based on the CME Rainfall Index and will be available March through October.[4]

References

  1. "Hurricanes Gustav, Hanna, and Ike Boost CME Group 2008 Hurricane Contracts Volume”. First Enercast Financial.
  2. "CME Weather Futures and Options Fact Sheet”. CME Group.
  3. "CME Weather Products". CME Group.
  4. CME Group to Launch Rainfall Contracts. CME Group.
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