Polish Weather Derivatives

®

Derivatives are financial instruments whose price and value derive from the value of assets

underlying them acording to the polish Act on Trading in Financial Instruments (Ustawa O Obrocie

Instrumentami Finansowymi”).

Weather derivatives are financial instruments that should be used to reduce risk associated with

adverse weather conditions, therefore are important part of a risk management strategy.

Of course, speculators may trade with other speculators as well as with hedgers.

The range of businesses exposed to weather risk is wide. Weather derivatives could help managed

price risk and volumetric risk too. Volumetric risk is important for cash flow, incom and cost

companies. We can defined that, as variability in supply and / or demand caused primarily by

variability in the weather.

The most important contract for the energy industry, steel factory, coal and fuel companies,

agriculture, retail, construction and others is HDDs allow to hedge against a warm winter. Therefore it

is not surprising that HDDs are by far the most dominant and first type of weather contract on polish

commodity exchange MGT S.A.

International Commodity Exchange will introduce HDD index for Poland at november, 2010.

It could be help use and develope weather derivatives market in Poland.

We have been registerde in Patent Office of the Republic of Poland:

POLISH WEATHER DERIVATIVES

®

POLISH WEATHER TEMPERATURE

OPTION

®

Commodity exchange offers three major classes of derivatives:

•

Futures which are contracts to buy or sell an asset at a specified future date.

•

Options, which are contracts that give a holder the right (but not the obligation) to buy or sell

an asset at a specified future date.

•

Swaps, where the two parties agree to exchange cash flows.

The value of a Financial derivative depends on the value of an underlying asset, index or commodity.

The most important for weather derivatives are:

Temperature based

•

Heating Degree Days (HDDs)

•

Cooling Degree Days (CDDs)

•

Average Temperature

•

Abnormal Temperature - of Days above…

Wind

•

Speed

•

Wind farm output

•

Variance

Precipitation

•

Snow

•

Rain

•

leavel of snowfall or rain

Combinations of the above.

Most temperature contracts are based on Heating Degree Days (HDD) for winter protection, and

Cooling Degree Days (CDD) for summer protection. We can defined a Heating Degree Days (HDD)

and Cooling Degree Days (CDD) like a measure of the cumulated variation of daily average

temperature comparing to the level of 18oC (65F) along a season or month.

Calculation of the HDD and CDD.

HDD =

∑

(18

o

C – T

i

)

CDD =

∑

(T

i

–18

o

C)

Ti - arithmetic average of maximum (Tmax) and minimum (Tmin) thermic temperatures of

day i.

Heating Degree Day Conversions

The number of degree days is determined by the difference between 18.3°C (65°F) and the

average of the high and low temperatures.

If we define:

For Europe (°C)

HDD

(°C)

=

∑

(18,3

o

C – T

i

)

For USA

(°F)

HDD(°F) =

∑

(65

°F

– T

i

)

We could converse European degree days toUS degree days by below formula.

1 European Degree Day = 1.8 US Degree Days