...it's not dark yet, but it's gettin' there...

April 26, 2007

Calling All Smartypantses

That means you, Will.

Due to the intense boredom initiated by "a very special American Idol," I began channel flipping and became transfixed by the excellent PBS documentary called ENRON: The Smartest Guys In The Room.

[Aside: Let me note for the record that chief Enron assholes Lay, Skilling and Fastow were all baby boomers.]

Anyways they mentioned that Enron was a major promoter of the early "weather futures" market. When I heard that, I thought, weather futures? wtf? now I've seen everything.

But it's a real thing, and apparently weather futures have exploded on the Chicago Mercantile Exchange. In fact, volume on the CME jumped 64% in the last year alone. It's now a 45 billion dollar market.

But what is it? How do you trade weather? According to CME's website:

CME created a weather derivative market which enables those businesses that could be adversely affected by unanticipated temperature swing or unusually high snowfall, to transfer this risk. It is estimated that nearly 30 percent of the U.S. economy is directly affected by the weather. As a result, the earnings of businesses can be adversely impacted by summers that are hotter than normal or winters that are much colder than anticipated. Just as professionals regularly use futures and options to hedge their risk in interest rates, equities and foreign exchange, now there are tools available for the management of risk from extreme movements of temperature. This sector of hedging and risk management products represents today's fastest growing derivative market.
A reasonably concise primer can be found here.

I guess the deal is that you can buy insurance to protect against catastrophic things that have a low probablility of occurring. But you can't easily insure against high probablility, low risk events like variations in the weather. Playing this market is a way for businesses to offset weather related losses. For example:

A ski resort depends on cold weather to stay in
business. To protect against the possibility of a warm winter, the resort can sell (go short) CME HDD contracts at a level they decide upon with assistance from a
weather-analysis company. A warm winter will result in a low HDD index, and the resort will hope to buy back its contracts at a lower price and use the profit to offset losses in the business.
I still don't get how it works though. I confess I don't understand futures trading as well as Hillary Clinton, but is this all smoke and mirrors bullcrap, or is it the wave of the future? And how, if at all, can this market be used to mitigate the effects of global warming?

Posted by annika, Apr. 26, 2007 | TrackBack (0)
Rubric: Science & Technology



Comments

-That means you, Will.

Great. Why don't you say "candyman" five times in front of a mirror while you are at it?

Posted by: Spanky on Apr. 26, 2007

I'll tell you everything you need to know about commodities. Ever been to the craps tables in Vegas? Of course you have. Same thing.

I couldn't help but watch that hit-piece either. I love the way they made Boxer look smart reading her cue card statements, and huffing and puffing. THAT is skill. Also had to admire they way the chiseled soundbites out of the traders' tapes to make them sound like they were doing something illegal, when they were only using the market to fuck California for only deregulating one side of the equation in their "deregulation" bill. Ahh, and the rehabilitation of Gray Davis was superb! You see, all his shit was in our imaginations. He was really a wonderful fellow brought low by the evil Ken Lay, and GEORGE BUSH. Thank God for PBS, I mean now that CBS just lays there and pisses themselves all the time. Shelly, get the pillow.

Posted by: Casca on Apr. 27, 2007

Sorry, but work is doubletime, now it's time to plant the garden all at once (and the latest addendum of fruit and nut trees [6, at least less than the 40 last year]), mowing, kids' sporting/music activities, started writing a second book, and we've just started lambing (twins yesterday, triplets so far today, 15 more ewes to go).

I've seen many references to insurance firms identifying climate change as a major risk of their's, and now this appears to be the way for them to hedge their bets (cover their asses, er margins actually, while taking advantage of a new market). Undoubtedly, many standing standard policies have likely been 'updated' to remove any language that might have bearing on impacts from climate changes, and they've added this new category to their portfolio.

I'd like to add more, but that's all I know and have no time to dig into it. See what happens when you announce your bloggeretirement? Everyone suddenly starts spending more time out of doors, with their family/SO, doing actual work at the office, etc.

Spanky, say "toy boat" ten times very fast...

Posted by: will on Apr. 27, 2007

Casca,

Who needs Gray when Arnold charts a centrist course? Indeed, I'm sure many conservatives think he's a liberal in too many categories. I'm amazed and impressed on his ability to reassess his stance on transportation/energy and come out with a relatively coherent approach.

Posted by: will on Apr. 27, 2007

-Spanky, say "toy boat" ten times very fast...

I can still say something at least. That will no longer be the case for you when a sasquatch comes to give you a teabagging as he repeatedly asks, "How do you like them apples?" It won't be very easy responding to his query while you have a mouthful of Chewbacca scrote.

Posted by: Spanky on Apr. 27, 2007

Spanky, even if it isn't original, get help.

Posted by: will on May. 7, 2007