CME Group Hurricane Contracts Get an Early Start

by Artemis on January 22, 2009

Chicago, Wednesday January 21st 2009 – The 2009 hurricane season is already underway in the financial marketplace as CME Group announced trading activity on the first day of opening the 2009 contracts. This starts the season nearly five months ahead of the 2008 season. According to CME Group, 3000 Seasonal Maximum Binary Option contracts were traded on January 5th, with a strike price of 15 for the Florida region, with coverage of max $30 million (the max payout). Following a very successful 2008 season, in which total coverage traded was nearly $400 million; CME Group extended Hurricane futures and options trading to encompass the entire year, from January 1 to December 31 to further meet customer need. This is an indication that those with tropical storm related risks are already thinking about protecting these risks through financial contracts.

Highly active tropical storm seasons in recent years have lead to the rapid development of CME Groups storm risk market. Those who follow and forecast tropical cyclone activity already publish projections based on current and expected conditions this coming summer. Dr William Gray and Philip Klotzbach with Colorado State University have already released their preliminary hurricane forecast calling for above average Atlantic basin tropical cyclone activity and major hurricane landfall in 2009. As responses to the enhanced storm activity we have encountered in recent years, CME Group has added a new family of Second Seasonal Maximum Binary Contracts, which act as a second event coverage, in situations where a second major hurricane occurs, and coverage was wiped out by the first major hurricane. The Second Seasonal Maximum contract complements the current hurricane Event Seasonal Maximum Binary contracts.

In response to the devastating 2005 storm season in which an estimated $79 billion worth of damage was caused, CME Group launched Hurricane contracts in March 2007 using the Carvill Hurricane Index (CHI) as a settlement mechanism. The underlying index measures hurricane size and maximum wind speed. Contracts trade at $100 for each 0.1 points on the index.

Given the early start to the Hurricane trading season and the fact that both retail and institutional investors are in need of uncorrelated assets given the current economic environment should bode well for these alternative risk products in 2009.

For more information on CME Group’s CHI-based instruments visit www.cmegroup.com/weather

Press release via First Enercast Financial

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