Trading on snowfall futures has begun.
Chicago Mercantile Exchange, which bills itself as the world’s largest and most diverse financial exchange, began Feb. 26 listing and trading snowfall futures and options on futures.
CME Snowfall futures will be based on a CME Snowfall Index and will be offered initially on two U.S. cities – Boston and New York. These contracts will trade on a monthly basis from October through April.
“The impact of weather can influence regional and local markets, playing a critical role in the overall economy,” according to CME Managing Director of Products and Services Rick Redding. “Since 1999, CME has been offering temperature-based futures products to help market participants manage weather-related risks. Backed by CME Clearing, CME weather futures provide the safety and soundness investors are seeking to manage their weather-related risk.”
Insurance companies, municipalities, retailers and others whose businesses can be affected by weather can also use the futures to hedge their risk.
“From municipal snow removal budgets to holiday retail sales, snowfall, or lack thereof, can have a major impact on local and regional economies,” observed Scott Mathews, president of WeatherEX LLC, a commodity trading advisor and manager of a branch office of Glass Futures Corp., an introducing brokerage firm.
He said that with CME snowfall futures and options, his clients will be able to hedge either the expense or the revenue side of the snow risk equation.
The CME Snowfall Index defines daily snowfall as the total snowfall recorded at a particular location between 12:01 a.m. and 12 p.m. midnight, as reported by Earth Satellite Corporation (EarthSat). Trace amounts of daily snowfall will be considered to be zero.
Monthly snowfall is defined as the sum of daily snowfall values for a particular location for a calendar month. A unique feature of the snowfall index includes the fact that the daily settlement price can be zero since a strike price of zero equates to no snowfall.
CME currently offers weather derivative products in 29 cities around the world, including 18 in the U.S., nine throughout Europe and two in Japan. The exchange also offers a frost index contract for Amsterdam, Netherlands. Monthly weather volume in January 2006 reached 108,000 contracts traded compared with 42,000 in January 2005. Overall weather volume in 2005 surpassed 889,000 contracts at CME.
Chicago Mercantile Exchange Inc. (www.cme.com) brings together buyers and sellers on CME Globex electronic trading platform and on its trading floors. CME offers futures and options on futures primarily in four product areas: interest rates, stock indexes, foreign exchange and commodities. The exchange moved about $1.4 billion per day in settlement payments in 2005 and managed $45.6 billion in collateral deposits at Dec. 30, 2005, including $3.2 billion in deposits for non-CME products.
CME is a wholly owned subsidiary of Chicago Mercantile Exchange Holdings Inc. (NYSE, NASDAQ: CME), which is part of the Russell 1000 Index.
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