CME to launch new weather derivatives

The Chicago Mercantile Exchange (CME) is to expand its range of weather derivatives with the launch of its Weekly Weather Index futures and options, beginning April 2.

Eight years since the launch of its first weather derivatives products, the CME has now increased the number of cities worldwide it covers to 35, offering both monthly and seasonal Heating Degree Days (HDD) and Cooling Degree Days (CDD) contracts.

By quantifying weather in terms of degrees above or below monthly or seasonal average temperatures, a dollar amount can be attached to the number of degrees by which the temperature of a given month or season deviates from an average value for that particular city.

The new contracts will measure the deviations in terms of weeks, and will be traded exclusively on the exchange’s electronic Globex platform.

Six of the CME Weekly Temperature contracts are scheduled to be launched on April 2, including for Atlanta, Boston, Chicago, Cincinnati, Dallas and New York City. The CME plans to add weekly temperature contracts for Baltimore, Des Moines, Detroit, Houston, Kansas City, Las Vegas, Minneapolis-St. Paul, Philadelphia, Portland, Sacramento, Salt Lake City and Tucson two weeks later.

According to Felix Carabello, Director of CME Alternative Investment Products, the new products will provide a useful addition to the monthly and seasonal hedges already available. “Customers will now have the opportunity to have more defined hedges on a shorter time frame,” he said. “This flexibility allows for multiple options to fit a variety of risk management strategies."

According to the CME, nearly 800,000 weather contracts worth a notional value of $21 billion traded on the exchange in 2006.