CME wants some of the IG pie

[meanreversion]

http://www.cmegroup.com/trading/weather/rainfall.html

How is this anything other than pure gambling? They even allow for binary options - this is surely a shameless attempt at nabbing some of the spreadbet market.

(Note that they don't actually identify which companies might benefit from hedging against rainfall! One could possibly argue that "farmers" might use these, but look at the weather points - they are all taken at airports, not traditionally farming areas!!)

 

[Dommo]

There are plenty of hedging/insurance type applications for weather derivs. I don't follow what you mean by nabbing spread betting market.

 

[gooseman]

http://www.cmegroup.com/trading/weather/rainfall.html

How is this anything other than pure gambling? They even allow for binary options - this is surely a shameless attempt at nabbing some of the spreadbet market.

(Note that they don't actually identify which companies might benefit from hedging against rainfall! One could possibly argue that "farmers" might use these, but look at the weather points - they are all taken at airports, not traditionally farming areas!!)

All Bar One use them. As do the counterparties that trade with AB1. That's one small example.....

 

[scose-no-doubt]

I remember reading something about retailers hedging against rainfall as it lowers takings. Could be many applications for this kind of thing in industry. What if you're a major gains producer or you have access to meteorological data through the operations of some department and want to make a bit of cheese? There wouldn't be a market for it if there wasn't any demand

 

[meanreversion]

Well much of this is news to me.. All Bar One use weather derivatives? I had no idea!!

Ok, maybe I should close the thread, as it exposes my ignorance

 

[scose-no-doubt]

just read Goosemans post and googled All Bar One. Must have been a prev post of his that I read aboots weather contracts lol.

 

[meanreversion]

I can't see much advantage for mechanical trading in weather contracts, it's probably a bit too random (or not irrational enough) and there isn't any decent data to backtest (or is there??).

 

[gooseman]

as ever, liquidity would be an issue...and this is one area of trading where big boys have an edge (forecasting technologies, seasonality data etc)

 

[meanreversion]

Yes, I imagine liquidity would be important for rain futures.

 

[Liquid validity]

Yes, I imagine liquidity would be important for rain futures.

:cheesy:

 

[gooseman]

without that you'd be blown away....

 

[gooseman]

when you were talking about slice f the IG pie, were you talking about binary options?

 

[meanreversion]

Yeah, that was what really caught my eye.

 

[Dommo]

I can't see much advantage for mechanical trading in weather contracts, it's probably a bit too random (or not irrational enough) and there isn't any decent data to backtest (or is there??).

The underlying for weather derivs is meteorological data; there is plenty of that.

There is a degree of correlation between weather and power instruments (for obvious reasons), so for those left to hedging a rain derivative, instruments like natural gas would be one place to lay off some risk. Again, plenty of history for this so you have a historic correlation study.

It is all a bit of a niche, but for power production, tourism, sports events, wine production, etc, there must be a real benefit in having the insurance.

 

[DionysusToast]

Well much of this is news to me.. All Bar One use weather derivatives? I had no idea!!

Ok, maybe I should close the thread, as it exposes my ignorance

Actually, your first opinion was correct. This is gambling and there is no reason for this market to exist.

I've posted this before but.....

Mon, 04/19/2010 - 00:11 EDT The financial reform bill being considered in the US Senate aims to impose stricter supervision of all derivatives and prohibit futures based on box-office receipts and the price of onions

Wed, 04/21/2010 - 16:55 EDT A proposed ban on betting on movie box office receipts took one step closer to becoming law. A U.S. Senate committee on Wednesday passed a financial regulatory reform bill that supports Hollywood in outlawing the trading of futures contracts based on predicted movie ticket sales.

Onions is interesting because there used to be onions futures but it got sh1t canned way back.

The Onion Futures Act (7 U.S.C Chapter 1 § 13-1]) is a United States law banning the trading of futures contracts on onions. It was passed on August 28, 1958, and remains in effect as of 2010[update].

This law is notable as the first and only ban on the trading of futures contracts of a specific commodity in United States history, and as a unique modern case with which to study the effects of the existence of an active futures market on commodity prices. In particular, proponents of futures markets often claim that they serve to stabilize otherwise volatile commodity supplies (and thus, prices) by providing a market-driven consensus mechanism for future price estimation. The conclusions drawn in subsequent studies of the effects of the Act upon price volatility have been mixed.

Oil is a good example of a commodity that has not benefitted from price stabilization as a result of the futures market, in fact oil prices are more volatile because of the futures market.

Of course, futures markets create a lot of revenue for exchanges and brokers, so the more they can create, the better.

Perhaps they can't wait for crap & trade...

 

[Dommo]

This is gambling and there is no reason for this market to exist.

Is it gambling from the perspective of the wheat producer who buys insurance?

 

[gooseman]

Is it gambling from the perspective of the wheat producer who buys insurance?

I think he's talking about binary options in general. actually these are popular as they can provide some gamma protection or hedging instruments again more exotic structures. as usual, finding enough liquidity to make it worthwile is the problem. look at liffe's attempt at gilt options for the umpteenth time.....

 

[arabianights]

goose you're getting mixed up my good man, it was corney & barrow, not abo.

You haven't moved downmarket have you

 

[gooseman]

thankfully neither serves a decent bitter so i avoid both like the plague. then theer's the clientele....

 

[DionysusToast]

Is it gambling from the perspective of the wheat producer who buys insurance?

Yes it is.

Futures markets in general do not do what they say on the tin.

Overall, Wheat producers, wholesale buyers and retail buyers all SUFFER because of the futures markets, they do not benefit. People that hedge now do so because the futures markets have made it necessary to hedge.


Should we discuss the price stability the futures markets brought to oil ?

Ultimately, futures markets suck money out of industries which the financial industry would otherwise have very little involvement.