1. Russian Trading System Stock Exchange How to work with weatherfutures? How to work with weather futures?

2. Using futures on the weather Hedging economic activity from unfavourable temperature curves of the environment. Speculative operations connected with the weather broadcast of a certain period. Speculative operations connected with the weather broadcast of a certain period. As the indices on temperature curves are figures which don’t depend on any events, the derivatives on these instruments can be used for diversification of risks for a portfolio. As the indices on temperature curves are figures which don’t depend on any events, the derivatives on these instruments can be used for diversification of risks for a portfolio.

3. 1.Energy resource producers 2.Energy resource consumers 3.Manufacturers of heating and cooling equipment 4.Manufacturers of warm clothes garments 5.Manufacturers and sellers of automobile spares 6.Tourist agencies 7.Housing and communal services 8.Beverage producers 9.Insurance companies Potential participants of weather futures market

4. 1.Parties concerned: 2.Energy producers 3.Energy suppliers 4.Producers of heating and cooling equipment 5.Manufacturers of warm clothes garments 6.Tourist agencies 7.Housing and communal services 8.Beverage producers 9.Etc. Implementation of weather futures

5. Futures on HDD/CDD indices Basic asset Index HDD/CDD Contract priceIndex value HDD/CDD Contract costIndex value HDD/CDD x N RUR Type of executionCash settlement (initial margin transfer) Months of executionMonthly Last day of tradingLast day of delivery month Date of executionLast day of delivery month Minimal initial marginxxx

6. HDD index contracts are for spells of cold weather HDD – heating degree days Degree day – the difference between the average day temperature and the base one. Subject to temperature being below the base level, the consumers will use more energy for heating, higher temperature will cause more consumption of energy for cooling. where HDD i – indicator for i-day; t ref – base level of temperature; t i – average temperature for i-day. HDD/CDD indices

7. CDD index contracts are for spells of warm weather. CDD – cooling degree days Degree day – the difference between the average day temperature and the base one. Subject to temperature being below the base level, the consumers will use more energy for heating, higher temperature will cause more consumption of energy for cooling. where CDD i – indicator for i-day; t ref – base level of temperature; t i – average temperature for i-day.

8. Hedging from high temperature in the winter Seller of black oil Is willing to hedge from the risks of sale decrease in the warm week of February Average statistical t= -20 °C For this level HDD for the week = max (0;(18+20))*7=266 points A thaw has been broadcasted up to t=–14 °C For an average temperature of –14 °C HDD for the week = 224 points Subject to high temperature (above -20°C), the consumers will not be in need of extra heating and the amount of black oil consumption will decrease. With temperature rise of 1 °C, daily loss of the black oil seller will amount to 1000 rub. or 7000 rub. For a week of thaw The goal is to keep the profit at the level of that of -20°C. A futures contract is able to set the profit from the sales of black oil at the required level Example 1.

9. Solution: To sell a futures on HDD index for the warm week Temperature above -20 °C (warmer): The futures allows the seller to get the profit, which covers the losses from the sales decrease Temperature below -20 °C (colder): The seller gets an extra profit from the black oil sales, whereas it’s the same as the sum of his loss with the futures contract Example 1. Hedging from high temperature in the winter

10. Example 1.

12. Date Operation Financial settlements 27.01.2006 Selling the futures 100 at 266 points (1 point = 10 rubles) IM = 10%*2660=266 rubles IM for 100 futures 26600 rubles 08.02.2006 Execution of 100 futures at = 230 points Getting profit from futures and returning the IM Profit from 100 futures = (266-230)*10 rub.*100 contracts = 36 000 rubles. Temperature rise up to –14,8 could cause in (–20-(-14,8))*7*1000 = 36000 rubles loss. Hedging from high temperature in the winter

13. Example 2. Hedging from high temperature in the winter Using the index of average daily temperature: MI=100+DAT DAT – average monthly temperature

14. 1.Which index to use. 2.Which base temperature to use. 3.How to calculate the average day temperature. 4.For which cities to calculate the temperature. 5.For which period of time to collect the data of the temperature curves. 6.Whether the hedgers have research of the dependence of financial-economic activity. Solutions to find when developing a weather futures

15. RTS Derivatives Department Tel/Fax:007 495 705 90 31 E-mail:forts@rts.ru Web:www.rts.ru or www.forts.ru Contact details: