As part of its weather derivative product offering the Chicago Mercantile Exchange (CME) allows interested parties to participate in their market for hurricane futures and options. Users can access exchange traded hurricane futures and options based on the CME Hurricane Index (CHI), a proprietary index originally developed by the ReAdvisory group of Carvill America, Inc. and acquired by CME in 2009. For the 2012 hurricane season there has been a change in the calculation agent for the CHI index.
The CME offers these hurricane futures and options to anyone seeking to hedge the risks of landfalling hurricanes impacting their bottom line. Users of these contracts are generally re/insurers, some hedge funds, some ILS funds and investors with exposure to specific storms and certain corporate users with hurricane exposure such as an offshore energy companies (although corporate users tend to transact through brokers).
For the 2012 year MDA EarthSat Weather will now act as calculation agent for the CME Hurricane Index and provide the index settlement values. MDA EarthSat actually took over in January, from the previous calculation agent risk modeling firm EQECAT. MDA will calculate the CME Hurricane Index (CHI) value for any landfalling storms, measuring the severity of hurricanes based upon strength and breadth of the wind field at the time of landfall and then reporting back a CHI value against which contracts could be triggered to payout.
“MDA understands the criticality of accurate information for settlement of these publicly-traded financial instruments,” says Steve Gaddy, MDA’s Meteorological Data Manager, “and we are honored to have earned the trust of the CME Group and the trading community in providing this service.”
The CME’s hurricane contracts have perhaps not lived up the promise that was expected of them. They have seen slow growth year-on-year and some market participants believe the underlying structures are too complex to really appeal to the broader hedging markets. However they do serve a valuable purpose and if this years hurricane season see’s a number of landfalling storms then we would really see how much traction and usage they can get.