There are two main types of weather derivative contracts. Standardized, exchange-based contracts are executed by a broker through the CME Group on behalf of traders or hedgers having commodity accounts with futures brokerage firms. The accounts of the counterparties are credited or debited according to the fluctuating index values of the weather measurements specifically covered in the contracts.

The second type, the over-the-counter contract, is executed bilaterally between end users and/or reinsurers or hedge fund investors, and is subject to the creditworthiness of the parties. These products tend to be more customized, structured for a specific company's weather risk.

The market for customized weather derivatives grew by nearly 30% in the past year with the overall market increasing by 20%, according to the WRMA. 

Weather derivatives are now enjoying significant market growth outside the U.S., particularly in Europe and Asia. Some 63% of last year's 228,000 OTC contracts were written in Europe while just 13% were in 2005, according to the WRMA.

"The international expansion has been very exciting for us," says Windle. "What we're finding in Europe are [brokerages] that pretty much focus on the larger industrial companies. We have other folks in the market who focus on the commercial and retail opportunities, and they've had some success." 

For its part, the CME offers more than 71 contracts in 49 cities (26 cities in the United States and 23 outside) and in 13 countries (the U.S. and 12 others), according to Paul Peterson, the director of commodity research and product development at CME Group.

Contracts for wind, solar and hydroelectric energy producers are under consideration, Peterson says. A separate entity, the Green Exchange, focuses on carbon trading. 

The weather derivatives allow individuals and companies to benefit when the weather doesn't behave as expected. The summer of 2009, for instance, was an unusually cool period with below-average temperatures during which many crops suffered in yield and quality. Utilities and merchant power generation companies, meanwhile, experienced lower sales during July 2009.

"Industries like energy, transportation, travel, entertainment, recreation, insurance, as well as institutions and municipalities that depend on certain weather conditions can diminish the uncertainty of temperature, rainfall, snowfall, windiness, sunshine or humidity and hurricanes by entering into weather derivative agreements," wrote Scott Mathews, the director of alternative investments at the Dow Corporation, in an autumn 2009 white paper, "Dog Days and Degree Days," that appeared on the CME Group's Web site. (http://www.cmegroup.com/trading/weather/files/WT133_Weather_White_Paper_Final.pdf). "Revenues and expenses can ebb and flow from changing weather, and these dollars can be protected, to an extent, with contracts that span the spectrum from insurance and reinsurance, to futures, options and over-the-counter transactions."

In an October 8, 2011 Wall Street Journal piece, Mathews described how the Minneapolis cooling degree day contract (which allows investors to hedge by adding up the number of additional degrees for a certain number of days of hotter weather) increased by 19.3% during the third quarter. In other words, the weather derivative vehicle, as an investment, outperformed gold, corn and the S&P 500 index, which fell 15.3% during that period.