The Chicago Mercantile Exchange (CME) has seen its first snowfall contract trade in the past week. With winter approaching companies are beginning to think about winter weather and seeking to hedge their exposures to either too much snow or too little.
In this case the traded snowfall contract provides the customer, a snow removal business, with cover against their being less snow than expected and therefore less snow removal business. The customer will receive a payout when it doesn’t snow and conditions meet the parameters set in the contract.
The trade consisted of 65 lots of a Detroit Vanilla Put to hedge against a lack of snow during the month of December in Detroit. The put options value increases the less it snows during December in Detroit. The trade cost was just the premium of the traded options. If snowfall conditions don’t meet the parameters set in the contract then the customer will receive $1,000 per number of contracts traded.
For any business, such as snow removal services, whose income over the winter relies either on having snowfall or not, the CME’s Snowfall Index Binary Options are a great way to hedge the risks of too little or too much snow. At the moment the options are only available in five cities (New York, Detroit, Chicago, Boston and Minneapolis) but we expect that to expand in the future.