Chicago Mercantile Exchange starts offering rainfall futures and options | Business | The Observer:
"...a hitherto unnoticed corner of the exchange is quietly growing in value by offering futures and options based on the weather. The newly minted rainfall contracts join existing products based on snowfall, hurricanes, frost and unusual lurches in temperature. They allow investors to go long on thunderstorms, short on drizzle or insure against a deluge.Class: a great essay might be discuss limitations and costs of hedging with these. Specifically consider a small grocery store, whose sales are tightly tied to weather (in a concave type function--the hypothetical store does well in really good or really bad weather). The answer would have to include cost of the hedge, whether the contract was for a site near the location, whether the contract size would "fit" with the size of the store profit fluctuations.
Hedging on the weather is a young business – the first weather derivative was traded in 1997 by a US power company, Aquila Energy. But trading futures and options on climatic conditions has grown to be worth more than $15bn annually according to the Weather Risk Management Association, which tracks activity. The CME says typical customers include utilities, concert promoters, sports impresarios, theme parks and any other businesses with profits highly vulnerable to the elements."