Just like beans and bonds, everybody has an opinion about the weather. And even with the financial markets reeling, both tree huggers and trailblazers might find a sunny sky in weather futures.

Yes, you can trade the weather rather easily, in fact. But weather is difficult to model like stocks or sugar because, unlike those more conventional assets, cash weather cannot be bought or sold or stored at a known cost of carry. Weather does not generate returns like interest or dividends and its impact is anything but identical across time or location. It is not a fungible commodity.

Weather is a completely transparent market, uncorrelated with financial assets, but closely connected to a host of other existing contracts, particularly energy. To that end, it also has a massive commercial audience, vital for any successful futures market. Some 20% of the economy is directly affected by the weather, including travel, construction and agriculture. The weather also has an impact on retail sales, state and municipal costs for snow removal, luxury vacation rentals and beach attendance. Weather affects it all.

For many years, managing weather risk meant buying weather insurance, which tends to be structured to protect against a particular catastrophe such as an earthquake or flood. Weather futures operate in a much different fashion, aiming to hedge against the changes in demand that a business will experience as a result of warmer or colder than normal weather. Known as volumetric hedging, this allows users to hedge the quantity of their goods sold rather than the price. Market participants are able to model how an extra hot summer will affect demand for everything from Slurpees to surfboards. The primary traded market to express these outlooks is the Chicago Mercantile Exchange s (CME) Weather Futures.

The weather market really began to take shape in 1997, when the first over-the-counter weather derivative trade took place. Koch Energy and Enron entered into a contract on a temperature index for Milwaukee for the winter of 1997-98 in which Enron agreed to pay the company $10,000 for each wintertime degree that was below normal.

Two years later, in the midst of the 1990s technology boom, the CME launched exchange-traded weather futures and options on futures, the first exchange-traded weather contract ever.

The most popular and actively traded contracts are those based on heating and cooling degree-days (HDD and CDD, respectively) in local markets around the world. Essentially, these are indexes based on temperature. Both HDD and CDD are calculated based on how many degrees the average temperature varies from the baseline of 65 Fahrenheit.

For the winter months, CME heating degree days (HDD) represent temperatures when energy is used for heating and equate to the number of degrees the day's average temperature is lower than 65 F. If a day's average temperature was 35 F would give you an HDD value of 30 (65 - 35). When the average temperature is over 65 F, the value of the HDD would be zero, because there is theoretically no need for your home heater on a day warmer than 65 .

Summer months are linked to an index of cooling degree days (CDDs), which equal the number of degrees an average daily temperature exceeds 65 F, and thus energy would be needed for air conditioning. A day's average temperature of 90 F would give you a daily CDD value of 35 (90 - 65). If the temperature were lower than 65 F, the value of the CDD would be zero. Just like with heating degree days, there would generally not be a need for air conditioning on days the temperature was less than 65 F.

The payoff on the HDD and CDD contracts is $20 times the HDD or CDD index; each one-point tick is $20. So if you buy one Chicago CDD at 500 and sell it at 750, you ve made $5,000, less commissions.

In the U.S., contracts are offered on 18 different cities ranging from Atlanta to Tucson, with most volume centered in the Midwest and Northeastern cities. The contracts are traded electronically on the Globex system from 5 p.m. CST to 2:15 p.m. the following day. Over 776,000 weather futures contracts traded in 2008.

And while weather markets are liquid, they are also extremely volatile. Traders note that there can often be a forecast change overnight, prompting the market to move 30 HDDs. On 50 contracts, that s a $30,000 loss or gain almost instantly.

Of course all trades are cash-settled: While you can physically deliver a truckload of corn or soybeans, delivery of a degree-day is impossible.

So who is trading weather futures? The energy industry s temperature risk is fairly obvious, with unanticipated temperature resulting in lower sales in warm winters or cooler summers. But the exchange is working hard to attract participants with weather risk who might not necessarily be involved in energy or agriculture. For example, a cold summer might prompt massive cancellation of hotel reservations at Disney World or sharply lower ice cream sales for Ben & Jerry s.

Speculators are also trading the weather, although weather specs bear no resemblance to the gun-slinging shoot-from-the-hip trading community that dominates stock indexes or precious metals. Those used to turning over dozens of e-minis will likely be disappointed by the pace in weather futures, which are "position markets," which are meant to be held for weeks rather than day-traded.

Still, the future is likely sunny for weather futures, which have already gained attention by being featured in The Wall Street Journal s Saturday edition. Trading volumes are also picking up. So are we near the point where Al Roker will be quoting CME s HDD contract in his morning "Today Show" forecast?

Maybe not. But in the interim, those fed up with stocks or soybeans might try their hand at betting on the snow or sunshine. Just try not to get burned.

Additional Info:

• Introduction to Weather Derivatives
• Weather Futures Product Info
• What Every CFO Needs to Know About Weather Risk Management