Big storms drive trade in snow derivatives

Snow derivatives started trading only two years ago -- and it's been snowing ever since.

A Washington, D.C.-area resident shovels a car out from in from of his home after being bombarded with snow. -- Feb. 11, 2010 (Mark Wilson/Getty Images)

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TEXT OF STORY

Bob Moon: I found something good to say about the winter storm blanketing most of the nation: It kept the groundhog from seeing his shadow today. Which supposedly means an early spring.

And it can't come soon enough for the airline industry, which looks to be headed for a record month of cancellations. The snow also brought a halt to work at 22 Ford, GM and Chrysler plants. And meat and grain deliveries have been curtailed. The Chicago Mercantile Exchange stayed open, though its trading floor was cluttered with overnight bags.

Which brings us to the financial hedging that's possible -- and even the money-making potential -- in something called "snow derivatives." Here's our New York bureau chief Heidi Moore.

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Heidi Moore: In 2009, the CME first allowed investors to predict snowfall and make money on the exchange if they were right. We've had record snowfall ever since.

CME's Tim Andriesen says companies need weather derivatives to hedge against losses when rain, heat, or snow can hurt their businesses.

Tim Andriesen: Everybody says you can't manage the weather, which is true. But you can manage the financial consequences of the weather.

Andriesen sees sunny skies ahead -- financially. Investors have bought five times as many snow contracts as last year.

Jeff Hodgson of the Chicago Weather Brokerage sells snowfall derivatives. Here's how they work:

Jeff Hodgson: I'm going to pay $10,000, and if it snows over 40 inches in Chicago, that option will be worth over $25,000. If it doesn't snow over that level, then I lose my $10,000.

Snow removers and insurance companies have the most to protect, so they're his best customers. Of course, snow derivatives only cover the cost. Someone still has to shovel it all away.

I'm Heidi Moore for Marketplace.

via marketplace.publicradio.org

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