Options on temperature degree days are amongst the most popular hedging tools of the traditional energy industry
They might be combined with energy price components (e.g. quantos) and be tailored to all kind of retail portfolios
Large utilities use them since more than 15 years but also smaller and medium size energy industry discover their advantages
Client pays premium but keeps upside
Premiums between different risk takers vary already significantly for relative simple structures, for complex ones which include a commodity price component this gaps could be up to 100%
Swaps and Collars:
Client pays less or even zero cost, receives protection on downside but looses upside
Products are more suitable for cash flow stabilization instead of pure protection
As client has potential payment obligation towards risk taker these structures are only accessible for large rated companies
