It is closely related to agriculture, energy, tourism and other industries, and weather index derivatives are gradually approaching
There are new developments in weather futures.
DCE recently stated that it is taking weather index derivatives as one of the key varieties for its index sector business expansion.
Previously, the relevant person in charge of the Zhengzhou Commodity Exchange also said that the Chinese version of weather futures is currently in the stage of vigorous research and development.
As the global climate changes, extreme weather, climate and water events are becoming more frequent and intense.
Weather futures are not physical futures and are not new in the international commodity market.
In the 1990s, based on the strong demand for climate change and risk management in all walks of life, the international market launched the weather index and its derivatives.
Compared with overseas markets, my country has not yet carried out standardized weather futures trading. However, with the gradual development of weather-sensitive industries such as agriculture, energy, tourism and retail in my country, the demand for weather hedging risks in the operation of the national economy continues to grow.
For example, some insurance and reinsurance companies provide the market with weather risk hedging tools through weather insurance products, but they cannot fully meet market demand.
Research and launch of weather index futures can provide another better and more efficient means of weather risk hedging for the real economy on the basis of existing weather insurance products.
Recently, DCE and the Central Meteorological Observatory jointly reminded that it is necessary to pay attention to meteorological changes, be prepared and be able to take actions in advance to reduce the impact on production and life.
At present, the two parties have cooperated to update the temperature fluctuation data of cities in my country for the past 30 years, and improved the temperature index compilation plan based on refined weather forecasts. At the same time, DCE will continue to explore and develop weather index derivatives.
As early as June 11, 2021, ZCE and the National Meteorological Information Center signed a strategic cooperation framework agreement. The two parties will fully launch the compilation and application of weather indices, and the research, development and listing of weather derivatives.
How do weather index futures work when it comes to hedging climate risks?
According to the relevant person in charge of the Zhengzhou Commodity Exchange, weather index futures are referred to as weather futures, and the trading principle is the same as that of commodity futures such as crude oil, cotton, sugar and other futures.
However, weather futures are an innovative derivative that adopts the form of futures trading and uses various weather indices as the trading target.
Agricultural business entities or other entities may, based on the impact of weather risks on their own production and operation, use “weather futures” hedging operations to avoid production and business risks and uncertainties brought about by weather changes.
"Taking temperature derivatives as an example, if farmers are worried that their own soybean or corn production will be reduced due to continuous sunny, hot and high temperature, in order to avoid risks, they can buy temperature index futures according to their own conditions. If there is an abnormally high temperature, the temperature index will rise accordingly, and the position will be closed. Afterwards, corresponding compensation can be obtained, and to a certain extent, the risk of production reduction caused by high temperature can be hedged.” said the relevant person in charge of the above-mentioned DCE.
In the study of soybean and corn producers in different regions such as Illinois, USA, using temperature index derivatives to hedge their risk performance, some foreign scholars found that purchasing related derivatives can reduce their income risks measured by yield by 10.8%~ 46%.
my country has a vast territory and complex and changeable climatic conditions. In recent years, the frequency of extreme weather and climate events and meteorological disasters around the world has increased, which has brought many adverse effects on the production and operation of enterprises in agriculture and other related fields. , one of the important constraints of sustainable economic and social development.
According to experts, combining weather indices that characterize the strength of weather phenomena such as temperature, precipitation, snowfall, and hurricanes with the derivatives trading mechanism to develop weather derivatives based on weather indices, to transfer weather risks through market-based means, and to be able to run the entire Societally attenuate or offset weather risks.
Market professionals said that the weather is closely related to the lives of residents and the production of enterprises.
Changes in indicators such as temperature, light, and wind speed directly affect the efficiency of new energy power generation, and also bring operational risks to industries such as agriculture, insurance, tourism, and retail.
Developing weather derivatives and providing necessary weather hedging tools will help improve the efficiency of market resource allocation and enhance the resilience of related industries.
Author: Qi Qi