WEST PALM BEACH, FL (www.hedgeco.net) – Hurricane Katrina’s recent action in the southern part of the United States is fueling complex weather derivative trades by hedge fund managers. According to reports from London, many hedge fund investors have continued to take positions betting on the impact of extreme weather such as rain, wind, and sun on agricultural commodity products and consequently its future prices. Part of the consequence from Hurricane Katrina was that it devastated the U.S. gulf coast region causing a global surge in petrol and gas prices.
According to news reports, the impact of Katrina has pressured hedge funds and other distributors of weather related derivative products to hedge additional exposure of such trading instruments. For instance, Katrina helped to create additional arbitrage opportunities for hedge fund managers in weather related products such as heating oil. Stephen Doherty told news reporters, “Weather volatility has a direct impact on commodity prices, and the relationship lies at the heart of the rise of use of weather derivatives.†Adding, “Cross-market activity by hedge funds is driving a big increase in volumes.”
Surges in trade volume have been reported by futures exchanges through out the world. According to recent reports, the volume of weather derivatives trades in the Chicago Mercantile Exchange, the largest futures exchange in the United States, has jumped to nearly 500,000 in 2005 so far. Last year the volume of such trades stood at about 122, 000.
Derivative instruments such as heating or cooling degree-day swaps have been bought or sold in larger numbers by investors recently. Those purchasing such instruments gain or loose when the weather rises above or falls below the stipulated level.
Paul Oranika
Contributing Writer
HedgeCo.Net
Email: Editor@hedgeco.net
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