Looking to give people in the energy industry and beyond a way to protect themselves from the billions of dollars in damage incurred during the overly active 2005 hurricane season, the Chicago Mercantile Exchange on Monday rolled out its CME-Carvill Hurricane Index futures and options. The underlying indexes will be calculated by Carvill, an independent reinsurance intermediary in specialty reinsurance that tracks and calculates hurricane activity.

In addition to insurers, other customers such as energy companies, pension funds, state governments and utility companies will be able to hedge their risk of hurricanes striking in the United States in five areas defined as the Gulf Coast, Florida, the Southern Atlantic Coast, the Northern Atlantic Coast and the Eastern U.S.

"These new CME Hurricane contracts will provide an additional way to help address the needs of the insurance industry and other markets," said Felix Carabello, CME director of Alternative Investment Products. "Following the devastating 2005 hurricane season that caused an estimated $79 billion in damage, it became apparent that there was limited capacity to insure customer claims. With these hurricane contracts, insurers and others will be able to transfer their risk to the capital markets and thereby increase their capacity to insure customers."

First announced in February, the Carvill Hurricane Index (CHI) will use publicly available data from the National Hurricane Center of the National Weather Service to calculate the maximum wind velocity and size of each official storm and its potential for damage. The front contract expires when a hurricane makes landfall with the expiration pegged to the CHI. The contract tick size is 0.1 CHI point, which is equivalent to $100.

Citing the "quietness" in some of the other weather futures contracts, one Northeast energy broker wondered just how much of a success the new hurricane contracts will be. "Like with any new addition to the markets, we will have to wait and see if people climb aboard or not. It will be interesting to see whether people take advantage of this new offering," he said.

A CME spokeswoman noted that while the contracts were available to trade Monday, no activity was recorded, which was to be expected. She noted that the contracts were launched so that people could become more comfortable with the product before hurricane season arrives in June.

John Cavanagh, joint CEO of the Carvill Group, said, "CME is the clear market leader in weather derivatives and we believe this new product will offer a wider range of catastrophe solutions to our customers. The convergence of the insurance markets and the broader financial community continues at a rapid pace, and our products, particularly in the catastrophe area, are becoming more commoditized in order to appeal to a more diverse range of capital providers. An exchange-traded derivative product for catastrophic hurricane risk is a natural progression to this trend."

Creating the index was no easy task. "The challenge was to develop an index that met the needs of both the derivative trading community and the insurance market," said Steve Smith, senior vice president of ReAdvisory, the analytical arm of Carvill. "We needed an index that is easily understood, simple to calculate and based on publicly verifiable data -- in short, an index which is transparent. Most importantly for the trading community was the requirement that the index could be calculated and settled within hours of an event taking place."

Hurricane futures trade on CME Globex electronic trading platform from 5 p.m. to 3:15 p.m. CDT the following day and options on hurricane futures will be available for trading 8:30 a.m. to 3:15 p.m. CDT on the CME trading floor.

CME also announced Monday that it is expanding its suite of weather derivatives and rolling out CME Weekly Weather Index futures and options on futures on 18 U.S. cities beginning April 2.

CME now offers Monthly and Seasonal Heating Degree Days (HDD) and Cooling Degree Days (CDD) contracts on 35 cities around the world. The contracts quantify weather in terms of degrees above or below monthly or seasonal average temperatures and attach a dollar amount to the number of degrees a month's or season's temperature deviate from an average value for that particular city. The new contract will measure the deviations in terms of weeks.

"By listing weekly weather contracts, CME is offering another alternative for our customers to hedge their risk associated to weather," Carabello said. "In addition to monthly and seasonal hedges, customers will now have the opportunity to have more defined hedges on a shorter time frame. This flexibility allows for multiple options to fit a variety of risk management strategies."

Six of the CME Weekly Temperature contracts are scheduled to be launched on April 2 -- Atlanta, Boston, Chicago, Cincinnati, Dallas and New York City. On April 16, CME Weekly Temperature contracts will be added for Baltimore, Des Moines, Detroit, Houston, Kansas City, Las Vegas, Minneapolis-St. Paul, Philadelphia, Portland, Sacramento, Salt Lake City and Tucson.

The futures contracts will trade only on the CME Globex from 5 p.m. to 3:15 p.m. CDT the following day. Trading on all of the contracts will terminate at 9 a.m. CDT on the first exchange business day that is at least two calendar days after the last calendar day of the respective contract period. Options on all CME weather futures will be traded on CME's trading floor from 8:30 a.m. to 3:15 p.m. CDT.

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