HedgeStreet, an online derivatives exchange based in San Mateo, Calif., last week launched financial contracts allowing investors to hedge against hurricane damage. The contracts let traders buy or sell contracts linked to estimates of hurricane damage issued by risk information service ISO.
The exchange is offering contracts with different strike ranges, for example $25 million-$50 million worth of damage, and these can be traded in the run up to ISO’s data releases after a hurricane. The price of the contract will depend on the perceived probability of the strike being hit. The contracts are binary options so the payout is all-or-nothing. If the investor’s view is right, he receives $100, if not, he loses only the premium paid for the contract.
Robert Dubil, chief market strategist at HedgeStreet, said the firm has traditionally attracted retail investors but is hoping the hurricane contracts will also appeal to institutional clients. He said trading volumes have been low so far, but noted that there has been little direct threat of a hurricane hit. He declined to name the market makers supporting the effort.