Company B is a major European gas distributor with a large weather exposure in France. Its revenues are badly affected by warm winters, which result in lower demand from its customers. It is looking to hedge against a lack of Heating Degree Days during the winter months in Paris.
A Heating Degree Day (HDD) is a measure widely used by energy companies and is equal, for any given day, to the difference between 18°C and the average temperature for that day (only if the temperature is below 18°C). The total number of HDDs over the winter is therefore a good measure of heating requirements for its customers.
- Option Type: Put Option
- Reference Weather Station: Paris Orly, France (WMO #7149)
- Risk Period: From 1 November until 31 March
- Weather Index: Total number of Heating Degree Days (HDDs) at the Reference Weather Station during the Risk Period
- HDD: For any given day HDD = Max(0 ; 18 – Tavg) where Tavg is the average temperature for that day
- Data Provider: Météo France
- Strike: 1,700 HDDs
- Tick: EUR 5,000 per HDD below the Strike
- Maximum Payout: EUR 1,000,000
- Settlement Amount:
- If Weather Index <= Strike then Company B receives (Strike - Weather Index) x Tick
- If Weather Index > Strike there is no Payout
- All payments are subject to the Maximum Payout
This Weather Derivative covers Company B against warm winters (i.e less than 1,700 HDDs) in Paris.
If there are a total of 1,649 HDDs in the Risk Period Company B would receive: (1,700 – 1,649) x 5,000 = EUR 255,000.
The payment, if there is any, normally occurs 5 business days after the end of the Risk Period (subject to data availability).