Enron is working on a swap product that will allow U.K. corporates to hedge exposure to rising gas prices. In a typical transaction, a corporate will pay an up front premium and enters a gas swap with Enron. If gas prices reach a predetermined strike price the corporate receives an offsetting payment from Enron, according to Catherine Woolgar, a trader in the weather risk management group in London.
The Houston-based company is working on the swap now because it has determined a 98% correlation between temperature and gas usage--and therefore price--in the U.K., allowing it to hedge out risk from selling the gas swaps in the weather derivatives market, Woolgar explained. "Instead of trading weather based on [heating-degree days], we're just converting weather into gas," based on millions of cubic meters of gas, she added.
Enron hopes to offer similar swaps elsewhere in Europe at a later date, according to Woolgar. Although the winter hedging season traditionally begins in October, she said the product won't be available until next month. It will be offered in seasonal, monthly and weekly maturities and will be marketed to independent gas suppliers across the U.K. She could not put a figure on notional sizes for the offerings. Enron has offered the product in the U.S. since December.