[StBernard] Exchange to launch hurricane-risk contract

[Westley Annis]

Exchange to launch hurricane-risk contract 
Insurers can hedge bets on extent of storm damage
The Associated Press
Updated: 11:47 a.m. CT Feb 14, 2007

CHICAGO - The Chicago Mercantile Exchange, the largest derivatives exchange
in the United States, announced Wednesday that it is launching contracts
that will allow insurers and others to hedge risk against hurricane damage.

The exchange, a unit of CME Holdings Inc., is teaming up with Carvill Group,
a reinsurance intermediary that will calculate the contracts' underlying
indexes of hurricane data used to calculate damage. Front contracts will
expire when a storm makes landfall, with expiration pegged to the index.

CME said contracts for "CME-Carvill Hurricane Index" futures, and options on
futures, will begin trading on the floor and on the Globex electronic
platform on March 12.

"Following the 2005 hurricane season that caused an estimated $79 billion in
damage, it became apparent that there was limited capacity to insure
customer claims," said Felix Carabello, director of alternative investment
products at CME, in a release. "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."

CME's announcement follows one last Friday by Nymex Holdings Inc., which
will list three new catastrophe risk index futures contracts in March. The
Nymex contracts will also trade on CME's Globex, per an agreement between
the two exchanges reached last year.

The move to list alternative investment contracts is a relatively new
development for the exchanges as they seek a wider group of market
participants. CME currently lists weather contracts based on temperatures in
35 cities worldwide as well as snowfall and frost indexes. Nymex began
trading property damage risk contracts last month.

The exchanges' new risk products provide another way to hedge risk in an
area that has primarily been the domain of insurers. In addition to
insurers, CME also sees demand from customers such as energy companies,
pensions funds, state governments and utility companies.

The new hurricane contracts will be available in five areas defined as the
Gulf Coast, Florida, the Southern Atlantic Coast, the Northern Atlantic
Coast and the Eastern United States.


Carvill will calculate the underlying indexes using publicly available data
from the National Hurricane Center of the National Weather Service. The
Index uses the maximum wind velocity and size, or radius, of each official
storm to calculate the potential for damage.

The hurricane contracts are part of the CME's push into a broad array of
product areas. The exchange offers futures and options on futures on
interest rates, stock indexes, foreign exchange, agricultural commodities
and energy.

In addition to weather contracts as an alternative investment, CME offers
housing derivatives on residential real estate.

The company plans to merge with CBOT Holdings Inc. mid-year.

C 2007 The Associated Press. All rights reserved. This material may not be
published, broadcast, rewritten or redistributed.Copyright 2007 The
Associated Press. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
URL: http://www.msnbc.msn.com/id/17150880/