Weather derivatives are derivatives contracts that are based on a development of a certain weather variable during the contract period. The weather variable under review can be temperature, rainfall, wind speed or sunshine.
Weather derivatives offer investors a way of hedging against unfavourable weather. For example, if the winter is milder than average, district heating companies will sell less heating and make less profits than in the case of normal weather conditions. By using weather derivatives the district heater can hedge their weather exposure.
HEX will launch weather derivatives based on the monthly average temperature. The futures to be launched will be based on an index calculated from the daily mean temperatures measured at the Helsinki-Vantaa weather station. The weather data is delivered by the Finnish Meteorological Institute.
