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Hurricane futures and options are financial tools designed to offset hurricane-related risk by offering a means of transferring risk to the capital markets.

Hurricane Event futures and options, one of three categories of Hurricane futures and options offered at CME Group, cover actual named hurricanes. These contracts are offered from January 1 and Decmeber 31and cover two regions:

  • Eastern U.S.encompassing the U.S. coast from Brownsville, Texas to Eastport, Maine
  • Cat-in-a-Box, a term used to describe an area encompassing the major oil & gas production region in the Gulf of Mexico

About the Index
Hurricane futures and options are settled to the CME Hurricane Index (CHI) which provides a numerical measure of the destructive potential of a hurricane.  This is calculated using maximum sustained wind speed of a hurricane in miles per hour and the radius to hurricane force winds of a hurricane in miles (i.e. how far from the center of the hurricane winds of 74mph or greater are experienced).

The higher the CHI number, the more potentially damaging the hurricane. For example, when Hurricane Katrina made landfall in Louisiana in 2005, it had a CHI value of 19.0. In contrast, Florida’s Hurricane Dennis that same year had a CHI value of only 6.9.

How the Futures Work
CME Group lists three Hurricane futures contracts at any given time. Each hurricane event futures contract is assigned a name which corresponds to the names assigned to storms by the World Meteorological Organization. When the first storm of the season makes landfall (for the Eastern U.S. version) exits the "box" (for the Cat-In-A-Box version), or dissipates, the futures contracts associated with that storm are settled and expired. Once this occurs, the futures contracts associated with the fourth storm of the season would then be listed.

Customers wishing to hedge against the potential damage of a named hurricane would assess their risks and then buy Hurricane Event futures at a specific CHI level, such as 10, a level at which they decide they would need protection from financial loss.

Hurricane futures are cash-settled to the CHI value at landfall (for the Eastern U.S. version) or to the largest CHI value while the hurricane is inside the "box" (for the Cat-In-A-Box version). That number is multiplied by a cash multiplier of $1,000 per 1 CHI point. Thus, a futures contract that settles to a CHI of 10 has a value of $10,000. If the hurricane does not make landfall in the specified region of the contract, then the contract settles to 0.

How the Options Work
Two types of options are offered on Hurricane futures.

Standard/Vanilla Options
Customers wishing to hedge against the potential damage of a hurricane would assess their risks and then buy Hurricane options at a specific strike price, such as 15 CHI, a level at which they decide they would need protection from financial loss.  Only call options (options to buy) are available.

Hurricane options are cash-settled at the CHI value of the hurricane at landfall (for the Eastern U.S. version), or to the largest CHI value while the hurrican is inside the "box" (for the Cat-In-A-Box version). That number is multiplied by a cash multiplier of $1,000 per 1 CHI point. Thus, a call option contract with a strike price of 15 CHI, that settles to a CHI value of 20, has a value of $5,000.  If no hurricanes make landfall in the specified region of the contract, then the contract settles to 0.  In this case, the buyer of the option would choose not to exercise his call.

Binary Options
Binary options on Hurricane futures pay a fixed dollar amount if the option is either “at,” or “in the money.”   This distinguishes them from standard/vanilla options as the value of standard/vanilla options vary depending on the difference between the strike price and the settle price. Only binary call options (options to buy) are available.

If the respective CHI value is equal to or greater than the strike price, the buyer receives $10,000.  If the respective CHI value is less than the strike price, the buyer receives nothing.