As the winter months enter the heart of snow season for much of the United States, some businesses — like snow removal companies or ski resorts — must think about revenue, which is largely tied to the amount of snowfall in a particular area. The Weather Channel this week featured a story on how those companies and others use futures markets to manage the weather risk associated with their business. Tim Andriesen, CME Group’s head of commodity products, was featured in the story and explained how weather futures work:
In a year when, for example, you’re looking for a minimal number of hurricanes, that’s the market expectation. Hurricane coverage would be less expensive. In a year where you’re expecting a lot, it would be more expensive. So one of the other benefits is that you can, on an ongoing basis, look at the value of the market and have products that reflect the value of that market. And what buying or selling this product does is provides me a financial hedge against that.
On the Chicago Mercantile Exchange in 2011, more than $9.2 billion in weather contracts were traded. According to the Weather Risk Management Association, another $2.4 billion in over-the-counter weather contracts were traded in the 2010/2011 marketing year. These include futures on regional temperatures, snowfall, rainfall, hurricanes and frost.
The Weather Channel discussed trading weather further in this video with Paul Walsh of Weather Analytics.