I would normally post this slightly off-topic article as a link, but found it interesting enough to put up in its entirety.
October CME Weather Futures Seen Stable Amid Limited Trade
Chicago, Sept. 28 (Bloomberg) -- October weather futures
contracts on the Chicago Mercantile Exchange are expected to open
little changed today amid limited trade. Traders said activity
across all contract months could increase as more traders enter
the market.
The October Chicago heating degree day contract was steady
yesterday with no trade at 390 HDDs, while the most recent bid-
ask spread was 370 HDDs bid at 4,100 HDDs. The New York contract
was stable at 220 HDDs with no trade. The contract was last at
210-229 HDDs, traders said. The Cincinnati and Atlanta contracts
were stable at 315 and 118 HDDs, with the last bid-ask spread at
311-324 and 110-132 HDDs, respectively.
``It looks like my earlier prediction that October could
dominate trading might have been incorrect,' said a trader with
Aquila Energy Marketing in Kansas City, Missouri. ``The out
months like December are still seeing as much or more activity
than October. I think we're likely to see increasing amounts of
price volatility as more traders, aside from the five key market
makers, come into the weather market over the next few weeks.'
The Aquila trader said that yesterday's eight December New
York weather contracts traded right at a level equivalent to the
20-year average HDDs.
Traders said liquidity remains low because several key
market participants for weather futures had yet to install
systems software needed to trade the instruments. Some were
waiting for better October weather forecasts to get involved in
the prompt month.
Existing 30-day forecasts indicate above-normal temperatures
for the four contract cities. Precipitation was expected to be
normal to above-normal in that period.
Traders and risk managers can use weather futures contracts
to offset the potential loss of revenue when weather diverts from
expected norms for commodities as diverse as grains to seasonal
items such as swimsuits and winter apparel, traders said.
Weather affects an estimated 20 percent of the $9 trillion
U.S. economy, and the over-the-counter market for managing
weather risk has grown considerably over the past few years, the
CME reported.
Each degree day change in the weather futures contracts was
valued at $100, CME said, with the contracts settling at the
beginning of the new month based on a cumulative heating degree
day total recorded by Rockville, Maryland-based Earth Satellite
Corp.
A heating degree day at a given location occurs when the
average temperature falls below 65 degrees Fahrenheit. For
example, if the average temperature on any given day is 55
degrees, then 10 heating degree days are reported for that day. A
cooling degree day would occur when the average temperature is in
excess of 65 degrees.
While trading in CME weather futures and options is
available 24 hours a day on CME's Globex2 electronic trading
system between 4:45 p.m. Eastern and 4:15 p.m., traders expect
most activity to occur daily between 10:00 a.m. Eastern to 4:15
p.m.
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