Hurricane derivatives trade in record volumes during 2011

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Use and trading of hurricane derivatives is approaching record levels already this year with nearly a month of the Atlantic hurricane season still to play out. Demand for hurricane derivatives, which provide a hedge against storms making landfall along parts of the U.S. coastline has grown this year according to this article from the Wall Street Journal.

Hurricane derivatives have changed hands 4,000 times this year, which equals the record levels set in 2009. The Chicago Mercantile Exchange where traders can buy and sell hurricane derivatives have experienced record volumes during 2011 and the expectation in the market is that the numbers will rise again during 2012.

However the hurricane season has been less severe than expected (as far as landfalling storms go) this year, which means that those winning in the hurricane derivatives market are the traders and speculators betting that storms will not make landfall rather than those looking for protection.

Hurricane derivatives provide a great way for protection to be bought quickly and as storms approach, it’s widely expected that their usage will grow as more insurers look to them as a source of additional cover and investors such as hedge funds see them as a way to speculate and diversify.

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