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Farmers can use weather derivatives to Hedge against poor harvests caused by drought or frost, Theme Park s may want to insure against rainy weekends during peak summer seasons, and power companies may use Heating Degree Day s (HDD) contracts to smooth earnings. Heating degree days are one of the most common types of weather derivative. Typical terms for an HDD contract would be like: for the November to March period, for each day where the temperature falls below 18 degrees Celsius keep a cumulative count. Depending upon whether the option is a Put Option or a Call Option , pay out a set amount per heating degree day that the actual count differs from the strike. Weather derivatives contracts initially began trading over-the-counter in 1997. As the market for these products grew, the Chicago Mercantile Exchange introduced the first exchange-traded weather futures contracts (and corresponding options), in 1999. The CME currently trades weather derivative contracts for 18 U.S. cities, 9 European cities, and 2 cities in Japan. Most of these contracts track cooling degree days or heating degree days, but recent additions track frost days in the Netherlands and monthly/seasonal snowfall in Boston and New York. EXTERNAL LINKS
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