What are weather derivatives?
The world’s first exchange-traded weather derivative began trading on September 22, 1999, at the Chicago Mercantile Exchange (CME). Weather derivatives originated initially as over-the-counter (OTC) products in the US less than two years ago. However, as participants sought greater liquidity, price discovery and transparency, the market had to move to an exchange-trading environment. The CME has initially listed temperature-related heating degree-day (HDD) index futures for four US cities but plans to add cooling degree-day (CDD) indices as well at more locations. Weather derivatives are financial instruments that can be used by organizations or individuals as part of a risk management strategy to reduce risk associated with adverse or unexpected weather conditions. The difference to other derivatives is that the underlying asset (rain/temperature/snow) has no direct value to price the weather derivative. Farmers can use weather derivatives to hedge against poor harvests caused by drou
