I n t r oduction to Weather Derivatives - CME Group

1I n t roduction to Weather Derivativesby Geoffrey Considine, , Weather Derivatives Group , Aquila EnergyIntroductionThe first transaction in the Weather Derivatives market took place in that time, the market has expanded rapidly into a flourishing over thecounter (OTC) market. Further growth in the end-user sector is somewhat limit-ed by the credit issues associated with an OTC market ( , satisfying theInternational Securities and Derivatives Association Master Swap Agreement).To increase the size of the market and to remove credit risk from the trading ofweather contracts, the Chicago Mercantile Exchange (CME) is introducingweather Derivatives to be traded electronically on the CME sGLOBEX 2system. The individual contracts are calendar-month futures (swap) contracts onheating degree days (HDD) and cooling degree days (CDD) as well as optionson document discusses some of the fundamentals of pricing andanalyzing Weather Of A New MarketThere are a number of drivers behind the growth of the Weather derivative mar-ket.

1 I n t r oduction to Weather Derivatives by Geoffrey Considine, Ph.D., Weather Derivatives Group, Aquila Energy Introduction The first transaction in the weather derivatives market took place in 1997 1. Since that time, the market has expanded rapidly into a flourishing over the

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