Overview of Weather Markets

From heat waves to arctic cold outbreaks, weather can have a significant impact on business. Temperature-based index futures and options from CME Group provide a way for market participants to manage weather-related risk.

CME Group offers Weather products on Heating Degree Days (HDD), Cooling Degree Days (CDD), and Cumulative Average Temperature (CAT). These products provide end users the ability to manage weather risks when temperatures deviate from monthly or seasonal averages.

A “degree day” is a measure of how much a day’s temperature deviates from 65 degrees Fahrenheit, or 18 degrees Celsius. This baseline temperature was established by utility companies after observing that air conditioners and furnaces are usually turned on when the temperature rises above or falls below this benchmark.

HDD and CDD futures and options are available on 13 cities across the U.S., from New York to Portland. They are also available on four European cities – Essen, London, Amsterdam and Paris.

Say the average of a day’s maximum and minimum temperature on a midnight-to-midnight basis in New York is 55 degrees Fahrenheit. Since the baseline is 65 degrees Fahrenheit, that would mean the HDD is 10 and the CDD is zero. HDDs and CDDs will never fall below the baseline, and as a result can never be negative.

If the average daily temperature is 55 degrees Farenheit all 31 days of the month, the cumulative monthly HDD would equal 310. Value at settlement for Weather contracts is determined by multiplying the cumulative HDD or CDD by the contract unit. For all U.S. cities, the contract unit is $20 times the respective HDD  or CDD Index. In this example, that would mean the value of the HDD futures contract would equal $6,200.

The contract unit is 20 pounds sterling for London contracts, 20 euros for the E.U. locations, and 2,500 Japanese yen for the Tokyo contracts.

Cumulative Average Temperature (CAT) is another type of Weather contract available at CME Group. While the HDD and CDD compare average daily temperature to a base temperature, CAT contracts take the average daily temperature as is and sum it over the period of the contract.

CAT futures and options are available on four European cities – Essen, London, Amsterdam and Paris – as well as Tokyo.

Let’s look at an example for Tokyo. In a 30-day month, assume the average daily temperature for each of the first 15 days was 10 degrees celsius, and 20 degrees celsius for the remaining 15 days. The CAT would equal 450.

To determine the value of the CAT futures contract, multiply 450 by ¥2,500 to get ¥1,125,000.

As climate-related events continue to influence business operations around the world, the CME Group Weather complex offers a way for market participants to manage their risk.