Curves

A curve is just an expectation of where a market, an underlying, or basically any outcome that needs to be forecasted, will end in the future.

WeatherMage makes use of degree day curves for each market that we support. The curves are very simply constructed by first taking the monthly average degree days (or CAT) in the season, using the latest 3 to 10 years of monthly data.

These monthly averages are broken down into daily averages for each respective month by simply dividing the monthly totals by the number of days in the month.

The top graph is the result of adding up each daily degree day averages linearly throughout the season. The result is a cumulative degree day expectation curve where at any point during the season a trader can easily see the number of degree days that are expected to have been accumulated up until that time. This is useful since most temperature based weather derivatives are based on the sum (cumulative) of all the daily degree days during the period.

The bottom graph begins with a simply plot of each daily degree day expectation by month (gray stepped area).

These two graphs represent the same thing, daily degree day expectations , but in different ways. Since they are merely averages of historical data, they are referred to as "Unbiased Averages" or "Unbiased Curves".

Before the season begins, the market may trade much higher or lower than what these curves show. This can be due to many reasons:

For example, market players may be biasing their own expectations based on El Niño or other teleconnections, and could bid or offer the market at levels that are much different than an unbiased measure.

As the season starts, and the actual degree days can begin to be measured, both graphs are updated. Traders can see this as the jagged portion of the bottom graph.

As the daily unbiased expectations are replaced by actual readings, the summation gets adjusted for the daily differences between actual and expected. The curve then moves to reflect the new information. The original unbiased curve that we are now adjusting for actual data is called the "Augmented Curve".

IMPORTANT: WeatherMage does not import forecasts into the Augmented Curve. This creates a large opportunity for weather traders who have decent forecasts of location temperature to capitalize on weather market mis-pricings.