Climate change provides rise to weather hedge
Financial Times, April 24 2007
The first Global Warming index is to be launched this week by UBS, allowing businesses most affected by the uncertainty of climate change - from ice-cream salesmen to makers of winter coats - to hedge their profits against it in a simple and transparent fashion.
Retail and institutional investors will also be able to buy exposure to, or short sell, the index in much the same way they would with the FTSE or Dow Jones stock indices. If temperatures rise, so will the value of the index.
Ilija Murisic, executive director of hybrid derivatives trading at UBS, said the impact of global warming had brought explosive growth in the weather derivatives market.
A recent report from PwC said the volume of weather derivatives traded on the Chicago Mercantile Ex-change jumped from $9.7bn in 2004-5 to more than $45bn in 2005-6.
"Global warming has created much more volatility in temperatures and weather conditions, which has ledto increased liquidity inthe weather derivativesmarket," Mr Murisic said.
"The weather derivatives market is very segmented and quite arcane but has good liquidity. We want to create an index where people can simply invest, like they can with a stock index."
The index is based on weather derivative contracts for winter and summer traded on the CME. These "heating degree day" and "cooling degree day" contracts measure the difference between average daily temperatures and a given base in a number of cities round the world.
The UBS index will initially be based on 15
UBS hopes the index will turn the complex business of investing in the world's weather into a popular asset class, one that is entirely uncorrelated with returns in other assets such as stocks or bonds.