Recently some Traders have asked, “What makes CX Markets a financial market and differentiates using CX Markets from just being a bet on the weather?”
Here we describe what makes this a Trading Market.
The short answer is this: Economic purpose.
Obviously weather can create losses in the “real” economy, and everyone is aware that these losses can be offset by financial products such as hurricane or flood insurance.
But insurance isn’t the only way to offset such losses. CX Markets is unique in that it’s the first marketplace built specifically to provide financial protection for small businesses and individuals with weather-related risks.
And because CX Markets’ contracts can also limit these losses, its markets are regulated as financial instruments by the U.S. Commodity Futures Trading Commission, also known as the CFTC.
The CFTC regulates a wide range of financial products including all futures contracts, options on commodities, many derivatives traded by large financial institutions and, of course, the CX Futures Exchange’s weather markets.
Sometimes these financial markets are compared to bets in the financial press. That’s because, unlike investments, every dollar that one market participant gains is lost by another market participant.
But because there’s an underlying risk in the “real” economy, this is not betting, it’s risk transfer. For example, a food truck owner will lose business if it rains and he/she may use CX Markets to buy a rain contract. If it does rain, he/she will get paid, and her gains are balanced by the losses of a speculator who had “bet” that it’s not going to rain. The food truck owner has hedged and transferred her risk to the speculator.
And that’s why CX Markets’ contracts are financial transactions.
Of course, hedgers can only transfer their risks if there are speculators participating in the market who are willing to take that risk. As the market grows and market caps at different locations get larger, we expect an ever increasing number of hedgers to join the market seeded by our growing number of speculators.
A little bit about us:
- CX Markets provides a weather market to allow you to trade the results of different weather events. Events range from the location of Tropical Storm Landfalls to the accumulation of snowfall on a particular day, in a particular city.
- CX Markets allows you to hedge against the financial risk that you may have based upon specific weather events, or to speculate on the weather.
- In the commodity market, trading occurs on assets like the price of oil, gold, even corn. People use assets like the ones mentioned to speculate in some cases, but also to hedge risk on their businesses. For example, a farmer who needs to purchase corn in a few months might “Buy Corn” on the market to hedge against the risk that the price in corn goes up which would make his/her purchase price of corn more expensive in the future. This is hedging. The same can be done with Weather. Let’s say X amount of snowfall will cause you to need to purchase snow plow services, you can place a trade for that amount of snowfall and if it snows that much, the payout from your trade pays for the plowing service. Would a certain amount of rain ruin your nonrefundable tee time on the golf course? Trade that amount! I can provide many more examples so don’t hesitate to follow up on this topic.
How is this “trading”?
- This is a trading market because Weather is considered a “commodity” and our marketplace is regulated by the Commodity Futures Trading Commission (CFTC).
- Our contracts are legal in all 50 states across the US because the contract structure fits the mold of a trading marketplace.
Hopefully this gives you a better understanding of the market we’ve created and how you can utilize it as a trader.