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.

  1. Cooling Degree Day - CDD

    The number of degrees that a day's average temperature is above ...
  2. Futures

    A financial contract obligating the buyer to purchase an asset ...
  3. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  4. Heating Degree Day - HDD

    The number of degrees that a day's average temperature is below ...
  5. Weather Derivative

    An instrument used by companies to hedge against the risk of ...
  6. Settlement Price

    In derivatives markets, the price used for determining profit ...
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