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article imageHow to make money off the weather

By Nathanial Benton     Sep 14, 2009 in Lifestyle
Of all the investments in the world, did you know the weather was one of them? You can make money by speculating things such as the inches of snowfall next winter in Boston to hurricane strength in the Gulf of Mexico. Welcome to weather futures.
These kinds of investments are commonly called "weather futures", and they are trading through the Chicago Mercantile Exchange right now.
Weather futures are traded much like other futures, which are speculations on goods such as oil. Let's say you're a chocolate facility and you need {x} amount of coca beans per month. What if there's talk that coca beans will go up due to higher demand of chocolate? The way to solve this is to buy a futures contract.
A futures contract is a way of securing some goods. Think of it as pre-ordering your favorite movie before it's released. It's a way to allow a company to claim rights on goods at a particular price before the company is ready to actually receive the goods. The company pays extra money, and in exchange they are allowed to lock in a date and price on which to receive the goods to prevent losses from inflation.
So what about weather futures? The most basic of all weather-future contracts is to speculate on the change of temperature. There is, however, different contracts that allow you to speculate on hurricane strength as well. When speculating on temperature, a buyer would pay an amount to wager on future temperature changes. If the agreed temperature level is reached, the buyer collects an amount agreed upon by the seller. However, if the buyer were wrong, the seller would keep the amount paid, and the contract would end.
These contracts, can prove to be quite useful. In the UK, utility companies find that as little as a one degree temperature change can cause up to a 5 percent change in the demand of natural gas.
In the United States and Canada there are 25 cities in which you can speculate about temperature changes, and roughly another dozen in Europe, Asia, and Australia. A little weather studying, and the right investments, could ultimately end up paying off.
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