Archive for September 15th, 2009

Investing in Weather

Tuesday, September 15th, 2009

An article on CNN.com yesterday explained how traders might be able to make money betting on the weather:

You can actually make money speculating that the temperature in Sacramento, California, will be warmer than it normally is. If that’s too dull for your portfolio, you can put money down on the inches of snowfall next winter in Boston, Massachusetts, or the strength of hurricanes in the Gulf of Mexico. These kinds of investments, called weather futures, are trading through the Chicago Mercantile Exchange right now.

… The most basic type of weather-futures contracts allow traders to speculate on changes in the temperature. And in many cases, companies use them like insurance policies. When speculating on temperature, a buyer would pay a premium for the option to wager on future temperatures. If the temperature hits a specified level, then the buyer gets to collect the amount agreed upon by the seller. If it doesn’t, the seller keeps the premium and the contract expires.

How accurate are these weather futures markets? Researchers in Smeal’s Laboratory for Economics Management and Auctions set up some weather markets of their own, and found that the market forecasts were at least as accurate as the major public forecasting services that served as benchmarks for the research: AccuWeather, the BBC, CNN, and the National Weather Service. On average, the temperatures predicted by the Smeal weather markets have been off by only about 6.6 percent.

For more on the weather markets research, click here.

Tags: Economics, Finance, G. Bolton, Kwasnica
Posted in News | 9 Comments