UBS Global Warming Index launched

Earlier this year, the Investment Bank launched the UBS Global Warming Index (UBS-GWI). The UBS-GWI is a tradable benchmark for global investments in the weather derivatives market and, as such, is the first weather index designed to reflect the current needs of the investment community. It provides a rational and simple way to obtain exposure to the weather as an asset class.

The UBS-GWI is constructed using liquid, actively traded Heating Degree Day (HDD) and Cooling Degree Day (CDD) weather futures contracts. HDD and CDD weather futures contracts settle on the difference between the average daily temperature and a given base temperature. Currently, the index is composed of weather futures contracts of 15 US cities traded on the Chicago Mercantile Exchange (CME) although there is no limit to the number of cities that could be included in the Index. To be eligible for inclusion, the volume of futures traded for any given city must represent 1% or more of the total weather deriva¬tives contracts traded on the CME. It is anticipated that cities from Europe and Asia will join the index in the medium term. A UBS-GWI Governance committee will meet annually to determine the composition and the weighting of the UBS-GWI index, which is currently composed of four US regional sub-indices: Northeast, Midwest, West and South.

Although there has been a dramatic increase in weather derivatives volumes over the course of the last few years, traded products using weather remain inaccessible to the vast majority of the financial commu¬nity. UBS’s new Global Warming Index, and hybrid structured products derived from it, should help to create a mainstream market in weather investing for the first time, providing a simple way for a broader range of institutional and private investors to gain exposure to the weather as an additional asset class, as well as for industries exposed to the whims of weather – such as agriculture, tourism and construction – to hedge their risk.