Introduction to Weather Markets. Charles Piszczor

Transcription

1 Introduction to Weather Markets Charles Piszczor March 22, 2012

2 Basic Overview Types of Weather Products Settlement Procedures Margining 2

3 CME Alternative Investments Weather Hurricane Rainfall, Snowfall & Frost 3

4 Weather Product Lines Monthly Seasonal United States X X European X X Asian-Pacific X X Canadian X X Australian X X Monthly Seasonal Frost X X Rainfall X X Snowfall X X 4

5 Types of Contracts Weekly Monthly Seasonal AT X X X CAT X X CDD X X HDD X X 5

6 Monthly & Seasonal Contracts Apr, May, Jun, Jul, Aug, Sep and Oct Oct, Nov, Dec, Jan, Feb, Mar and Apr 6

7 Weekly, Monthly & Seasonal Contracts Apr, May, Jun, Jul, Aug Sep, Oct, Nov, Dec, Jan, Feb and Mar 7

8 CME Weather Locations A2/P2=Calgary A7/P7=Toronto A4/P4=Edmonton A8/P8=Vancouver A5/P5=Montreal A9/A9=Winnipeg 6 Canadian 11 European D0/G0=London D8/G8=Barcelona D1/G1=Paris D9/G9=Rome D2/G2=Amsterdam DQ/GQ=Madrid D3/G3=Berlin D6/HL=Oslo-Blindern D4/G4=Essen D7/B7=Prague D5/G5=Stockholm 24 U.S. H1/K1=Atlanta HR/KR=Houston H2/K2=Chicago HS/KS=Sacramento H3/K3=Cincinnati HA/KU=Salt Lake City H4/K4=New York HV/KV=Baltimore H5/K5=Dallas HW/KW=Boston H6/K6=Philadelphia HX/KX=Kansas City H7/K7=Portland V3/A3=Colorado Springs H8/K8=Tucson VF/A0=Jacksonville H9/K9=Des Moines VG/AT=Little Rock H0/K0=Las Vegas VH/AH=Los Angeles HK/KK=Detroit VK/AK=Raleigh Durham HQ/KQ=Minneapolis VU/AU=Washington D.C 3 Australian 2F/6T=Bankstown, Sydney 3F/7T=Brisbane Aero 4F/8T=Melbourne Regional 3 Asian/Pacific Rim G6=Tokyo G7=Osaka HM/HJ=Hiroshima 8

9 General Weather Contract Information Initial Launch Date: Summer of 1999 Contract Size: $20 times the monthly index Index Provider: MDA EarthSat Weather Pricing Unit: One degree day index point has a value of $20 Tickers: Specified for each city and season by code Settlement: Cash settlement on the second Exchange business day after the derivatives contract month Trading Platforms: Options & Futures are both offered offexchange via Block Trading; Options & Futures may also trade via open outcry; Futures are traded on CME Group Globex electronic platform.

10 Hurricane Derivatives Based upon calculations from MDA, who calculate the CME Hurricane Index ( CHI ) 4 Types of Hurricane Contracts Futures Options Binary Options Event Named Named Named Seasonal Accumulated Accumulated Accumulated Seasonal Max Largest Largest Largest Second Event 2 nd Largest 2 nd Largest 2 nd Largest 10

11 Hurricane Derivatives Hurricane Contracts for 9 different locations 11

12 Standard Hurricane Derivatives Contract: $1000 times the respective CME Hurricane Index Tick Size: 0.1 CHI Index Point Tick Value: 0.1 CHI Index point which equals $100 Hours: Sunday through Thursday from 5.00p.m. to 3.15p.m. Chicago time Available: January 1 through December 31

13 Rainfall, Snowfall & Frost Derivatives 3 Types of Contracts Monthly & Seasonal Futures Options Binary Options Globex & Blocks Open Outcry & Blocks (European Style) Open Outcry & Blocks (American Style) 13

14 Rainfall & Snowfall Locations 14

15 Standard Rainfall Derivatives Futures Contract Size: $500 times the respective CME Rainfall Index Tick Size: 0.1 Index Point (=$50 per contract) Options Underlying Contract Size: 1 CME Rainfall Index Futures Contract Tick Size: 0.1 Index Point (=$50 per contract) Binary Options Underlying Contract Size: 1 CME Rainfall Index Futures Contract Trading Unit: $10,000 Tick Size: 0.01 Index Point (=$100 per contract) Hours: Sunday through Friday from 5.00p.m. to 3.15p.m. Chicago time Available: March 1 through October 31

16 Settlement Procedures FUTURES For outright monthly contract months, a combination of the last sale, higher bid, lower offer or midpoint of the bid/ask is used to derive settlements. For strips, if there is a Globex trade or a block trade, such trades are taken into account; if no such trades exist, the sum of the individual component months will determine the settlement. OTC market information is also referenced where appropriate. 16

17 Settlement Continued OPTIONS Option trades are converted to standard deviations using a model based on Stephen Jewson s model for pricing weather. This standard deviation creates prices in the entire options series which is then applied to the open strikes. 17

18 Standard Portfolio Analysis (SPAN) developed in 1988 Calculates futures performance bond requirements exclusively on the basis of overall portfolio risk at both the clearing and customer level Over the last 20 years, SPAN has become the industry standard for portfolio risk assessment Used by more than 50 registered exchanges, clearing organizations, service bureaus and regulatory agencies around the world SPAN calculates performance bond requirements to ensure that the funds available are sufficient to meet most market events However, not so excessive that customers and clearing firms have more money tied up than necessary 18

19 Margining Continued How SPAN Works: SPAN evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of derivative and physical instruments might reasonably incur over a specified time period (typically one trading day.) This is done by computing the gains and losses that the portfolio would incur under different market conditions. At the core of the methodology is the SPAN risk array - 1. A set of numeric values that indicate how a particular contract will gain or lose value under various conditions 2. Each condition is called a risk scenario 3. The numeric value for each risk scenario represents the gain or loss that that particular contract will experience for a particular combination of price (or underlying price) change, volatility change, and decrease in time to expiration 19

20 Margining Continued SPAN software products: PC-SPAN Basic single-user desktop version that provides a quick, inexpensive and simple way to calculate SPAN margin requirements across multiple exchanges Originally used primarily as a tool for auditors SPAN Risk Manager Also a single-user desktop program, but adds risk analytics to the margin calculation Customers can use various options models and what-if analyses to see the impact of changes in price Futures commission merchants can incorporate this second level into their bookkeeping function in their clearing fund calculations 20

21 Trade Execution 1. Futures are traded on CME Group Globex electronic platform 2. Futures & Options may also trade via open outcry 3. Futures & Options are both offered off-exchange via Block Trading through the voice brokered marketplace 1. Minimum Block Trade 20 contracts 2. Reported to the Globex Control Center within 15 minutes of execution 21

22 In Conclusion Companies have the opportunity to differentiate themselves from their peer group by buying the weather needed to optimize their business and reduce earnings volatility through a global weather risk management market. Benefits of weather risk-management instruments include: Stabilized Cash Flow and Earnings Reduced risk Focusing on core businesses Further strengthening of the balance sheet If you are not hedging you are speculating.

23 CME Group Information Charles Piszczor Associate Director, Research & Product Development Heidi Centola Manager, Weather Products

24 Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. The Globe Logo, CME, Chicago Mercantile Exchange, and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. CME Group is a trademark of CME Group Inc. All other trademarks are the property of their respective owners. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT, NYMEX and CME Group rules. Current rules should be consulted in all cases concerning contract specifications. 24