As extreme weather bites, Wall Street finds new ways to speculate

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Back in my early reporting days covering the Chicago Board of Trade in Chicago, old-timers used to point up to the windows on the original trading floor looking down La Salle Street and talk about how the weather sometimes dictated trading prices. If they saw it raining outside, for example, that could impact crop futures.

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Investors have been trading the weather for as long as there’ve been financial instruments. Orange juice futures. Dutch coffee. Farmers used to hedge their crops by buying contracts on the CBOT.

These days, with climate change hitting hard, weather derivatives are a booming business, and some financial firms — and exchanges — are cashing in. Average trading on listed contracts on the Chicago Mercantile Exchange more than tripled last year, and the notional size of the market is now about $25 billion, according to Bloomberg.

That’s tiny compared to the oil futures market, which is estimated at about $2 trillion. But the point is that as weather becomes more extreme, investors are finding ways to hedge their bets, or speculate on what might happen. We’ve written before about catastrophe bonds. But this is a growing new area — much like the old but with new contracts that speculate on weather around the world.

Some might say this is Wall Street’s way of making a game out of climate change. But with extreme weather poised to have a devastating economic impact on business and economies going forward, it only makes sense that those who might get hit will look for ways to protect themselves. And others to find ways to profit.

The only thing to watch for, as with all derivative markets, is signs of abuse, manipulation, or over-leverage — which we’re sure will come in time.