Hedgestreet, an online exchange based in San Mateo, Calif., launched financial contracts last Monday allowing investors to hedge against hurricane damage. The contracts are available to both retail and institutional clients and offer the chance to 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 USD25 million to USD50 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 USD100, 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 since Monday, but noted also there has been little direct threat of a hurricane hit. He declined to name the market makers supporting the effort.
Hedgestreet is an authorized designated contract market and derivatives clearing organization, which received Commodities Futures Trading Commision authorization in mid 2003. Co-founder Russell Andersson said the firm believes there will be a definitive move to listed derivatives as a result of increasing counterparty and credit risk problems in the over-the-counter markets, such as the Federal Reserve's concern with credit-default swaps.
