The Chicago Mercantile Exchange announced today that it will launch hurricane index futures and options products starting March 12.
The underlying indexes will be calculated by Carvill, a leading independent reinsurance intermediary in specialty reinsurance that tracks and calculates hurricane activity.
"These new CME Hurricane contracts will provide an additional way to help address the needs of the insurance industry and other markets," said Felix Carabello, CME Director of Alternative Investment Products.
"Following the devastating 2005 hurricane season that caused an estimated $79 billion in damage," he noted, "it became apparent that there was limited capacity to insure customer claims."
In addition to insurers, other customers such as energy companies, pension funds, state governments and utility companies will be able to hedge their risk of hurricanes striking in the United States in five areas defined as the Gulf Coast, Florida, the Southern Atlantic Coast, the Northern Atlantic Coast and the Eastern U.S.
"With these hurricane contracts, insurers and others will be able to transfer their risk to the capital markets and thereby increase their capacity to insure customers," he said.
The new index will use publicly available data from the National Hurricane Center of the National Weather Service. The Carvill Hurricane Index (CHItm ) uses the maximum wind velocity and size (radius) of each official storm to calculate the potential for damage.
The front contract expires when a hurricane makes landfall with the expiration pegged to the CHI. The contract tick size is 0.1 CHI point, which is equivalent to $100.
CME said the new instruments will be part of its expanding weather derivatives product line. It will be called the CME-Carvill Hurricane Index futures and options on futures contracts.
CME currently lists weather contracts based on aggregate temperatures on 35 cities around the world as well as snowfall and frost indexes. CME introduced weather derivatives in 1999. In 2006, traded CME Weather derivatives had a notional value of $22 billion.
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