LONDON (Reuters) – Extreme weather such as the hurricanes expected to batter the southern United States in coming weeks is fuelling demand for complex weather derivatives to hedge volatile commodityprices.
After Hurricane Katrina struck the oilfields and refineries of the U.S. Gulf last year the cost of petrol and gas spiked to record highs. Energy producers have since flocked to weather-swaps in a bid to limit potential losses.
The Chicago Mercantile Exchange, the largest futures exchange in the U.S., traded a record 867,000 weather contracts last year, compared with 122,000 in 2004, and says it is set to equal or beat the record this year.
“There is now a wide acceptance that weather is a business risk which you will be penalised for not hedging,” said CME director Felix Carabello.
In the simplest trades investors buy or sell so-called heating or cooling degree-day swaps, used primarily to safeguard income against warm winters or cool summers.
The buyer of the swap may be compensated whenever temperatures rise above or fall beyond an agreed level.
