In a world where almost anything goes, no one should be too surprised that the Chicago Mercantile Exchange recently announced that as of Feb. 26 it will begin trading snowfall futures.
The Associated Press reports that the world’s largest derivatives exchange said the new product which will be traded electronically should help cities manage risk associated with snow accumulation. Insurance companies, retailers and other businesses with a lot riding on the weather can also use the futures to hedge their risk.
The impact of weather can influence regional and local markets, playing a critical role in the overall economy according the Rick Redding, the exchange’s managing director of products and services. The Mercantile weather futures provides the safety and soundness investors are looking for to manage weather-related risk, he said.
Snowfall futures and options are geared to a snowfall index focusing initially on Boston and New York. The index will change based on official daily snowfall totals. Investors can buy and sell contracts trading on a monthly basis from October to April. A trader makes money on a contract when the idex rises after it is purchased and loses money when it falls.
Last fall the Mercantile began trading futures contracts based on the number of frost days in Amsterdam after a major construction project in the Dutch capital was delayed several times due to persistent frost, resuling in heavy financial losses.
Source: Associate Press
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