CHICAGO — First came temperature futures, then frost-day futures. Now, futures involving how much snow falls at Logan Airport in Boston or New York's Central Park have arrived.
In the latest evidence that almost anything goes in the marketplace, meteorologically speaking, the Chicago Mercantile Exchange said Thursday it will begin trading snowfall futures and options contracts later this month.
The world's largest derivatives exchange said the new product, which will trade electronically starting Feb. 26, should help cities manage risk associated with snow accumulation. Insurance companies, retailers and other businesses with a lot riding on the weather also can 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," said Rick Redding, the exchange's managing director of products and services. "CME weather futures provide the safety and soundness investors are seeking to manage their weather-related risk."
Here's how it will work.
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 through April. A trader makes money on a contract when the index rises after it is purchased and loses money when it falls.
It all may make little financial sense to a small retail investor, but the Merc is counting on it succeeding with large companies just as temperature-index or weather futures have since they were introduced in 1999. More than 889,000 weather contracts were traded last year and the pace is picking up in 2006, with 108,000 traded last month, the exchange said.
Last fall, it 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 a persistent frost, resulting in heavy financial losses.
"We're seeing more and more hedge funds and banks trading the weather contracts," said Brian O'Hearne, managing director of the environment and commodities markets for Swiss Reinsurance Co. and president of the Weather Risk Management Association.
"From the standpoint of municipalities or companies that are concerned with excessive snowfall and whether they will have shipment of goods, there's now the opportunity to hedge your removal costs or transportation delays or other weather-related exposure," he said. "CME's had a very good idea on the weather."
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