CME prepares to launch hurricane derivatives

The Chicago Mercantile Exchange (CME) will launch hurricane index futures and options on March 12.

The futures and options will be traded through the CME's Globex electronic trading platform. CME expects users will include insurance providers, energy companies, pension funds, state governments and utility companies.

The underlying will be an index of hurricane size and maximum wind speed, developed by the US specialist reinsurance company Carvill. Contracts will trade at $100 for each 0.1 points on the index. A relatively small hurricane with a 60-mile radius and 74 mph winds would score 2.5 on the index. Hurricane Katrina would have scored 19.

Carvill claims that its index matches damage inflicted better than the previous Saffir-Simpson scale, which rates hurricanes in categories 1 to 5. The contracts will cover five separate areas: the Gulf Coast, Florida, the southern and northern Atlantic coast and the eastern US as a whole.

Last year, the online exchange HedgeStreet launched derivatives based on the estimated damage done by hurricanes.