Extreme weather such as the hurricanes expected to batter the southern United States in coming weeks is fuelling demand for complex weather derivatives to hedge volatile commodity prices.
After Hurricane Katrina struck the oilfields and refineries of the US Gulf last year, the cost of petrol and gas spiked to record highs. Energy producers have since flocked to weather-swaps in a bid to limit potential losses.
The Chicago Mercantile Exchange (CME), the largest futures exchange in the US, traded a record 867,000 weather contracts last year, compared with 122,000 in 2004, and says it is set to equal or beat the record this year.
"There is now a wide acceptance that weather is a business risk which you will be penalised for not hedging," said CME director Felix Carabello.
In the simplest trades investors buy or sell so-called heating or cooling degree-day swaps, used primarily to safeguard income against warm winters or cool summers.
The buyer of the swap may be compensated whenever temperatures rise above or fall beyond an agreed level.
The spiralling price of oil has magnified the effects of guessing wrong on predictions for energy demand. If weather risk is 10 per cent and the price of a barrel of oil is $20, there is a potential $2 liability. With oil at $80 a barrel the potential liability is quadrupled. Crude prices are now close to $70.
Around three quarters of exchange-traded weather bets are referenced to heat and cold, but there are also contracts on rain, snow and wind.
The agreements can also be tailored to short periods so that, for example, sports event organisers can protect themselves against weather that deters attendance at games.
In the case of a hurricane, investors might put a bet on the path of the approaching storm, with circles placed around the area and investors getting paid on wind speed and proximity to a specified location.
While weather-dependent businesses such as farmers are traditional weather derivative investors, hedge funds are among the biggest drivers of growth, Mr Carabello said.
"Hedge funds are big energy and agricultural products traders and so use weather forecasting services. To choose not to hedge for them would be like buying groceries and then leaving them at the counter."
In a typical trade a fund could buy protection on an index of rainfall, and sell a commodity future. After a hurricane, the losses on the short oil position would be offset by a payout on the long rain trade.
Bigger variations in temperature have made the US a more fertile ground for the weather markets than Europe, but French and British energy companies at the vangaurd of European growth," said Michael Moreno, a director at London-based Speedwell Derivatives. "After a quiet period the market is picking up again," he said. "French companies are dominant."
Globally, utilities account for 69 per cent of enquiries, according to consultant PWC, but users such as construction firms are starting to see the benefits.
"If it's too hot you can't build roads," Mr Moreno said.
In Europe, ABN Amro initiated the market in 2001, with a deal for a Dutch workers' union to hedge payments to construction workers when it was too cold to work. Euronext.liffe, the London futures market, experimented with weather contracts but dropped the product, and there are no plans for a relaunch, the exchange said this week.
Chicago offers European weather contracts, with London's Heathrow airport among the most traded. Dutch utility Essent is forming a weather derivatives desk, which it hopes will be operational later this year.
Nyame Degioot, manager of emissions and weather at the firm, says extreme weather events such as hurricanes stoke pressure on energy companies to buy protection.
"The weather has a lot of influence on the amount of energy we supply," he said. "It's something we can combine with our trading of emissions."
In addition, Europe's new carbon trading scheme, has established a highly weather-dependent market in carbon dioxide.
"That is something everybody in our business should be getting involved with," Mr Degioot said.