Abstract

Weather is an important fundamental factor which affects almost every sector of the economy. Previous research on the effect of weather focused on temperature effects and the use of weather derivatives to hedge. This thesis provides an alternative view on hedging against decreases in temperature by comparing the hedging effectiveness of futures contracts on commodities whose prices are influenced by temperature, which are the frozen concentrated orange juice (FCOJ) and natural gas futures contracts, to that of a futures contract designed to hedge decreases in temperature, which is the heating degree days (HDD) futures contract. The results indicate that the HDD futures contract performs better than the FCOJ and natural gas futures contracts, in hedging against decreases in temperature in Orlando.