Weather Future

AAA

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.

RELATED TERMS
  1. Settlement Price

    In derivatives markets, the price used for determining profit ...
  2. Weather Derivative

    An instrument used by companies to hedge against the risk of ...
  3. Heating Degree Day - HDD

    The number of degrees that a day's average temperature is below ...
  4. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  5. Futures

    A financial contract obligating the buyer to purchase an asset ...
  6. Cooling Degree Day - CDD

    The number of degrees that a day's average temperature is above ...
Related Articles
  1. Options & Futures

    Introduction To Weather Derivatives

    Learn about a financial instrument that makes temperature a tradable commodity.
  2. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  3. Investing Basics

    Explaining Forward Rate Agreements

    Forward rate agreement (FRA) refers to an interest rate or foreign exchange hedging strategy.
  4. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  5. Mutual Funds & ETFs

    ETF Analysis: United States Natural Gas Fund LP

    Find out more about the United States Natural Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations of it.
  6. Mutual Funds & ETFs

    ETF Analysis: United States Oil Fund

    Find out more about the United States Oil Fund, the characteristics of USO, and the suitability and recommendations of the ETF for investors.
  7. Investing

    Why High Yield Still Has A Role To Play

    An asset class of this bull market has been high yield debt, as many searching for income in a low-rate world have turned to these higher-yielding bonds.
  8. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Gold Sector

    Find out more about the top ETFs that track the gold sector, such as the SPDR Gold Shares ETF, the PowerShares DB Gold ETF and the iShares Gold Trust ETF.
  9. Mutual Funds & ETFs

    UCO Vs. UWTI: Two Different Leveraged Oil ETFs

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF and VelocityShares 3x Long Crude Oil ETN, and the mechanics and differences of these funds.
  10. Investing Basics

    Explaining Contract for Differences

    A contract for differences is an agreement to exchange the difference in value of a financial product between the time the contract opens and closes.
RELATED FAQS
  1. What types of futures contracts are typically sold on an exchange?

    There are futures contracts available and traded on exchanges for virtually every class of investment asset, ranging from ... Read Full Answer >>
  2. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  3. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  4. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  5. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  6. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  2. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  3. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  4. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  5. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  6. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!