Friday, November 12, 2010

Weather Wagering: Reducing Rainfall Risk

For over a century, commodity exchanges have provided a way to hedge against (or speculate on) price fluctuations for crops, livestock, metals, and other materials. More recently, financial products have been developed which allow investment directly in the weather conditions which can in turn affect commodity prices. Last winter, for example, the CME Group introduced options based on the amount of snowfall in 5 U.S. cities. Joining the existing snowfall and temperature products, the exchange last week began offering contracts on rainfall amounts.

The 9 cities involved with the new investments are:
  • Chicago O’Hare International Airport (WBAN 94846)
  • Dallas-Fort Worth International Airport (WBAN 03927)
  • Des Moines International Airport (WBAN 14933)
  • Detroit Metro Airport (WBAN 94847)
  • Jacksonville International Airport (WBAN 13889)
  • Los Angeles Downtown USC Campus (WBAN 93134)
  • New York LaGuardia Airport (WBAN 14732)
  • Portland International Airport (WBAN 24229)
  • Raleigh/Durham International Airport (WBAN 13722)
CNBC this morning interviewed the president of Chicago Weather Brokerage, which specializes in this type of product. Although acknowledging that trading in the new contracts has been negligible, Jeff Hodgson was bullish on potential market opportunities.

More background from Medill Reports of Northwestern University:
A new Chicago brokerage plans to take uncertainty out of the weather

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