these price changes in terms of four variables: a trend in time, April price, July CDDs in Des Moines and August CDDs in Des Moines. All four of these variables are statistically significant in explaining the variability in corn price. August is more significant as a predictor than July. From these results, it is clearly possible to hedge changes in corn price using Des Moines CDD monthly contracts. This model is highly statistically robust.

We note that there is also a strong mean-reverting behavior in this model such that the correlation between the Dec. - April price change is negatively correlated with April price. If one were seeking to hedge against volatility in corn prices, weather derivatives may be an attractive avenue, depending upon the relative pricing of corn futures and options, and weather swaps and options. Conclusions There are many challenges to the effective use and management of weather options, and we have detailed a few of them. Pricing models for weather derivatives exist at many levels of sophistication and the simple analytical model shown here is not necessarily what the market makers use.

This said, a simple model can give a rough idea of what an option should cost. Weather derivatives can be very useful to risk managers who understand options and the risk profile associated with buying and selling weather options relative to their business. It is fairly straightforward to add weather options to a Value At Risk (VAR) calculation.

There is a range of interesting complications, however, in adding weather options to a portfolio that already contains risks correlated to climatological variability. While the CME is listing only CDDs and HDDs, Aquila can structure OTC contracts on rain, snowfall, wind, etc. For more information on such meteorological variables, please contact the Aquila Energy weather desk using the contact information below. Potential participants in the weather market would be well advised to become acquainted with the useful resources provided online by the National Weather Service, and programs by the National Oceanic and Atmospheric Administration such as the Climate Prediction Center (CPC) and the Climate Diagnostics Center (CDC). For more information about weather derivatives, please contact the Aquila Energy weather desk at: 1-800-891-3687 or visit our Web site at www.aquilaenergy.com/guaranteedweather.htm 10 .