Monday, February 7, 2011

Let It Snow, Let It Snow, Let It Snow....If You're Long Snow Derivatives

Did you know that you can trade 'snow derivatives' on Chicago Mercantile Exchange (CME)? It has been available since 2009, and ever since, we've had the record snow year after year.

From Marketplace @Public Radio (2/2/2011):

Heidi Moore: In 2009, the CME first allowed investors to predict snowfall and make money on the exchange if they were right. We've had record snowfall ever since.

CME's Tim Andriesen says companies need weather derivatives to hedge against losses when rain, heat, or snow can hurt their businesses.

Tim Andriesen: Everybody says you can't manage the weather, which is true. But you can manage the financial consequences of the weather.

Andriesen sees sunny skies ahead -- financially. Investors have bought five times as many snow contracts as last year.

Jeff Hodgson of the Chicago Weather Brokerage sells snowfall derivatives. Here's how they work:

Jeff Hodgson: I'm going to pay $10,000, and if it snows over 40 inches in Chicago, that option will be worth over $25,000. If it doesn't snow over that level, then I lose my $10,000.

Snow removers and insurance companies have the most to protect, so they're his best customers. Of course, snow derivatives only cover the cost. Someone still has to shovel it all away.

Chicago Weather Brokerage's website suggests it also offers temperature derivatives and rain derivatives. Checking CME's website, I've also found derivatives on frost and hurricane.

Hightlights of the snow derivatives (info from CME):

  • Contract size: $500 times CME Snowfall Index
  • Product: snowfall in inches in select US cities
  • Contract months: Nov, Dec, Jan, Feb, Mar, Apr
  • Hours: Open Outcry Sun 5PM - Fri 3:15PM
  • Position Limits: 10,000 contracts all months combined
  • Ticker symbol:
Boston - SB
New York - SX
Chicago O'Hare International - SW
Minneapolis International - BV
Detroit International - EK
New York LaGuardia - FG


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