Who Owns the Weather?

Forget pork bellies and coffee beans, the largest segment of the Chicago Mercantile Exchange (CME) over-the-counter derivatives market is the weather. That’s right, the venerable old exchange has found a way for people to make money when the temperature changes outside.

Lest you think we’re making this up, there is a serious reason behind these weather-related financial products. The market got started back in 1997, when El Niño turned winter upside down in the United States. The unusually warm winter meant that households kept their furnaces off — and utility companies lost billions of dollars of revenues.

Just like stock options — in which investors speculate on future up or down movements of a stock price — buyers and sellers of weather derivatives are essentially taking their best guess as to how hot or how cold the future is going to be. Power generating companies, for example, buy temperature options to offset the unexpected costs of sudden spikes in power demand. And companies that benefit from such heat waves — manufacturers of air conditioners — sell these options.

Individuals, of course, are welcome to get in on the action. If the unexpectedly hot summer weather is getting you down, don’t complain — seek compensation! Have your broker buy a temperature option whose price rises in step with the summer’s heat.

All seriousness aside, we have to smile and wonder what new financial instruments will up in the future? How about one for teenagers who can’t get dates to the high school prom? They should be compensated! Invest in a date option…