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. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  2. Weather Derivative

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

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

    The number of degrees that a day's average temperature is below ...
  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 ...
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  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. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  4. 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 >>
  5. 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 >>
  6. What does a futures contract cost?

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