In conjunction with the Weather Challenge: The Weather Prediction Markets

For all of you involved with the Weather Challenge, and even those who aren't, I encourage you to sign up for the Penn State Weather Prediction Markets. These markets are part of a scientific experiment being run jointly by the Penn State Meteorology Department, the Smeal College of Business and is sponsored by the National Science Foundation. Not only is it a terrific learning opportunity for those interested in weather risk management but a chance to make REAL money with no risk!

It's pretty simple. Basically you will trade contracts known as derivatives that obtain their value based on the high temperature on a given day in a given city.

EXAMPLE: A contract may specify that it will be worth $1 if the temperature in Jacksonville, FL is 82 or 83 on October 7th. If the high temperature on that day is in fact 82 or 83, the contract is worth $1. If however, the high is not within the bounds specified by that contract, in this case <82>83, then the contract is worth nothing.

In terms of the actual trading of these contracts, you can either write (sell) these contracts or you can (buy) them. The market prices that you as a trader sets for these transactions should in theory reflect the degree of confidence in a particular forecast.

EXAMPLE: If the above mentioned contract (KJAX - 10/7/08 - 82/83) is trading around 50 cents, it is reasonable to assume that the market has pegged a 50% chance of the high being 82-83. This is because the contract will be worth 1$ if it hits, or $0 if it doesn't, thus the market price is essentially the expected value of that contract verifying.

Upon signing up and at the start of each new city, you will be given free money and some initial contracts to start off with. Just like in a real market, those with a forecast that veers from the market's expectations stand to either take a big gain or a big loss. The market participants are both meteorology students and business students, so this gives the meteo's a chance to use their forecasting skill to their advantage. Unlike in equities trading, there are very few restrictions on "insider information" when it comes to commodities trading. The cities used for these markets correspond to the WxChallenge making things even more convenient. So don't just forecast for the sake of forecasting, put your forecasts to work and make some money in the meantime.

Feel free to ask me any questions. You can sign up and obtain more information on the following web page:

lema.smeal.psu.edu/prediction (no "www")