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Weather Products The majority of the weather contracts bound to date have been temperature based, covering cooling degree days ("CDD's") for the summer or heating degree days ("HDD's") for the winter. A degree day is the difference between the average temperature in a given day and 65° Fahrenheit (18° Celsius). 65° was chosen as the base because this is the temperature at which consumers typically use neither heating nor cooling energy. Weather contracts are written as insurance or as derivatives, with
the most commonly used type of contract being HDD and CDD call options
and swaps. Contracts are also written based on rainfall, snowfall,
stream flow, and wind speed. These are sometimes combined with temperatures
in a dual-trigger structure, to generate a meaningful index that
reflects a company's exposure. Contracts are written for single
or multiple seasons (summer, winter, growing season), and may cover
a wide variety of geographical locations. |
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