weather future

A type of weather derivative that obligates the buyer to purchase the value of the underlying weather index - measured in heating degree days (HDD) or cooling degree days (CDD) - at a future date. The settlement price of the underlying weather index is equal to the value of the relevant month's HDD/CDD multiplied by $20. Weather futures can enable businesses to protect themselves against losses caused by unexpected shifts in weather conditions.

The popularity of weather futures is rapidly growing and becoming a popular method for energy companies to hedge against a change in demand due to changes in temperature. For example, if the month of October is warmer than expected, customers would not use as much heat. This in turn would cause a loss to the energy company. If, however, the energy company had sold a weather future for the month of October, the energy company would receive (because its obliged to sell) the value of the October's HDD, which in turn would compensate for the losses.