Weather conditions and volume demands are a local phenomenon. These volume swings have a great economic impact because the industry is capital intensive with low profit margins. A swap and vanilla options are most often used with capped payouts. It could be structured with a strike price at some mean number. Settlement is against the National Weather Service reports based on temperature or to a much smaller extent, precipitation.
Seasonal tenor is most frequent.
A solution to managing natural gas exposure over a heating season is with a weather swap that hedges volume risk. The hedger would be paid in the event the winter is warmer than normal. Commodity contracts frequently call for physical delivery. There is substantial room for growth in this market. Current volume averages two transactions a day.