Trading in weather derivatives – or futures contracts that allow betting on or hedging against certain meteorological occurrences – has skyrocketed on the Chicago Mercantile Exchange in recent months: more than 500,000 contracts had traded by the end of August, more than three times as many as during the whole of 2004. The Financial Times has a neat introduction to the CME weather derivatives market (Quotes).

In a recent Reuters article Stephen Doherty, chief executive of weather derivative consultant and software provider Speedwell Weather Derivatives said that "weather volatility has a direct impact on commodity prices, and the relationship lies at the heart of the rise of use of weather derivatives. Furthermore, "cross-market activity by hedge funds is driving a big increase in volumes."

related items:
Protecting Winter Profits (pdf), CME