Weather futures allow businesses to protect themselves from losses caused by unexpected changes in weather conditions.
Future weather payouts are based on the cumulative difference in a measured weather variable, usually recorded temperature, over a fixed period.
Weather futures emerged in the early 1990s as a way for companies to hedge their weather risks based on changes in indices that measure changes in average daily temperatures.
The most common weather futures contract applies to the recorded temperature measured in HDD or CDD in the future.