Hot weather slows weather derivatives trading volumes

by Artemis on August 11, 2011

Environmental Finance, the monthly magazine covering the impact of environmental issues on lending, insurance, investment and trading decisions, have published an interesting news article on the weather derivatives market today. The article shows that the recent hot weather across the U.S., which resulted in the fourth warmest July on record, has impacted weather derivatives trading volumes.

We wrote recently that the heat wave experienced across much of the U.S. had enabled some savvy weather derivatives traders to cash in on price increases for some degree-day weather derivative contracts on the Chicago Mercantile Exchange (CME). In particular prices for some cooling degree-day contracts had jumped by as much as 60% allowing traders to make significant profits. The increase in prices though may have contributed to a slowdown in trading volumes.

The Environmental Finance article shows that the hotter than normal conditions have not encouraged trading. The market works best when temperatures fluctuate and this summer we haven’t seen that as conditions have been consistently warmer than average. The article suggests that many traders will have been holding their positions making it hard to find sellers.

According to Environmental Finance trading volumes on the CME for the year to date are down around 50% on last year. However, one smaller piece of the weather derivatives market is significantly up, 3,000 seasonal strip contracts (which cover between two and seven month periods) have traded so far this year compared with just 250 last year, this supports the notion that traders have been buying to hold.

Read the full article over on Environmental Finance.

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