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Mammoth Weather Trade Roils Euro Mart

A weather derivative transaction executed last week by ABN AMRO on behalf of a Dutch counterparty--and said to be the largest end user deal to trade so far--caused swap spreads to blow out and threw dealers into a frenzy. "The market is jittery to say the least," said a weather professional in London. He noted that spreads on heating degree-day (hdd) swaps for the November-March winter season referenced to Heathrow Airport widened by as much as 10 hdds Wednesday from levels close to 1,700/1,702 hdds prior to the trade. Alex Schippers, head of the weather group at ABN in Amsterdam, and a spokesman declined comment.

Dealers' explanations for the trade, said to be in the region of EUR100 million (USD90.54 million), were as mutable as the weather itself. One trader identified the Dutch counterparty, predictably perhaps, as a tulip grower. Others said the end user is a pension fund or an arm of the Dutch government looking to hedge against lost productivity through staff absence over the winter. Most agreed that ABN has been trying to get this particular deal done since shortly after launching a weather group over a year ago, and the payout is referenced to temperatures at specific times of the day. They also concurred that a transaction of this size, up to 200 times the average size of a weather derivative deal, is a feather in the cap of ABN.

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