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.

INVESTOPEDIA EXPLAINS '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. Weather Derivative

    An instrument used by companies to hedge against the risk of ...
  2. Hedge

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

    A financial contract obligating the buyer to purchase an asset ...
  4. Settlement Price

    In derivatives markets, the price used for determining profit ...
  5. Heating Degree Day - HDD

    The number of degrees that a day's average temperature is below ...
  6. Cooling Degree Day - CDD

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

    Introduction To Weather Derivatives

  2. Futures Fundamentals
    Insurance

    Futures Fundamentals

  3. All About Liquid Commodities
    Options & Futures

    All About Liquid Commodities

  4. Curious About Stock Index Futures? Read ...
    Options & Futures

    Curious About Stock Index Futures? Read ...

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center