By Alex Skorecki
The first exchange-listed weather derivatives contracts for Asia will be launched by the Chicago Mercantile Exchange, the US’s biggest futures exchange, later this month.
Weather derivatives allow investors and businesses to hedge against future conditions, including temperature, rain and wind. The CME contracts will apply to temperature changes as measured in the Japanese cities of Tokyo and Osaka, with summer and winter contracts for each.
There will be futures and options contracts. Futures will be traded on Globex, the CME’s electronic platform, and options in Chicago on the floor of the exchange.
Each contract will be worth Y250,000 multiplied by a temperature index.
The global market for weather derivatives grew by 10 per cent to $4.6bn in the year to March, according to the Weather Risk Management Association, although most contracts are traded over-the-counter.
On-exchange weather derivatives have been slow to build momentum despite wide potential industrial use, especially in the energy sector. The CME is the only exchange where contracts have attracted more than negligible volumes.
The CME lists contracts on 10 US and five European cities. It reported 4,000 trades in June, compared with total contracts of 70m.
Euronext.Liffe launched contracts two years ago for London, Paris and Berlin but delisted them for lack of liquidity. Tiffe, the Tokyo futures exchange, expressed interest in a launch four years ago but has since shelved plans.
The Met Office in the UK has said it hoped to introduce European contracts for the over-the-counter market but yesterday said it was “still looking”.
Source: Financial Times UK