Exchange Traded Hurricane Contracts

Published on July 29, 2009

The National Oceanic and Atmospheric Administration (NOAA) forecasts a “near normal” hurricane season, and so far there have not been any named storms in the Atlantic.  NOAA forecasts are closely watched by insurers, investors, and property owners for obvious reasons.  After a number of active years, most everyone would like a boring season for 2009.

Financial innovation knows no bounds and it is now possible to trade “hurricane contracts” on exchanges.  Forbes published an interesting article outlining some of the features of these contracts.  While the first trading in hurricane related contracts occurred last year, there are now ways to bet on hurricane activity in much more granular ways:

Contracts come in a variety of flavors. You can get coverage against a storm of specific size hitting one of seven geographic areas. Or you can bet on the severity of the season. Convinced that four Ike-size storms are brewing? You might buy a “seasonal aggregate 40” contract–$2,500 premium for a payout of $10,000 when the CHI values of the season’s named storms surpass 40 points.

Then there are contracts tied to individual storms. Trading in these will pop when Ana, Bill and Claudette (this year’s names) form. CHI values and contract pricing for name storms will be updated constantly until the storm has made landfall. Trading will continue until the contracts settle, usually within 36 hours of landfall.

The “CHI Index” referenced in the article incorporates new ways  of categorizing hurricanes that go beyond the primitive Saffir-Simpson scale which is based only on wind speed rather than other factors such as storm diameter which can also impact losses.

It will be interesting to see how the season plays out and whether there will be political backlash against speculators who bet on an active season and financially profit from such transactions.

Exchange Traded Hurricane Contracts
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