Weather Future

DEFINITION of 'Weather Future'

A type of weather derivative that obligates the buyer to purchase the value of the underlying weather index - measured in heating degree days (HDD) or cooling degree days (CDD) - at a future date. The settlement price of the underlying weather index is equal to the value of the relevant month's HDD/CDD multiplied by $20. Weather futures enable businesses to protect themselves against losses caused by unexpected shifts in weather conditions.

BREAKING DOWN 'Weather Future'

The popularity of weather futures is growing rapidly and becoming a more common method for energy companies to hedge against a change in demand due to changes in temperature. For example, if the month of October is warmer than expected, customers will not use as much heat. This will cause a loss for the energy company. If, however, the energy company has sold a weather future for the month of October, the energy company will receive (because it's obliged to sell) the value of October's HDD, providing compensation for its losses.

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RELATED FAQS
  1. How does weather impact the share prices of utility stocks?

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  3. What kinds of derivatives are traded on an exchange?

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  4. What is the difference between options and futures?

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  6. Do I own a stock as of the trade date or the settlement date?

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