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Derivatives

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  • February 7, 2022
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Degree Day Option

A weather derivative that is used to minimize weather risk by providing a one-sided hedge on the downside while maintaining the upside potential. This option allows the holder to get paid whenever the degree days settle above or below a preset strike– this is similar to typical cap option (caption) and floor option (floortion) structures. In the most common degree day options, a grower buys a put option and is paid a specific amount per degree days that settle below an agreed strike. This structure offsets potential losses in revenues by establishing a minimum revenue floor. If degree days settle above the strike, for this put option, the grower losses will be limited to the option premium.


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