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Hurricane hunches and hedges

Oil and agriculture futures are old news. Now, speculators can bet on hurricanes, too.

By HELEN HUNTLEY
Published August 15, 2007

Let the betting begin.

When tropical storms like Dean start churning in the Atlantic, a small cadre of hurricane speculators springs into action.

They're out to make money by predicting the path, the strength or the damage from the season's big storms. However, researchers at the University of Miami and University of Iowa hope some of the speculators will do something else: help us understand how people decide where a hurricane is headed.

The goal isn't to replace the National Hurricane Center but to gather information that might be useful in improving hurricane warning systems.

The two universities teamed up to launch the Hurricane Futures Market in 2005 and are now in their third hurricane season.

While their market is still just an experimental tool, other markets have been shown to be useful in forecasting everything from oil supplies to presidential elections. Some companies even use prediction markets in decision making.

Hurricane market participants get $100 in seed capital to buy and sell contracts based on where a hurricane will make its first U.S. landfall. Contracts for the most likely locations cost the most, with prices rising or falling as a storm shifts course and traders change their opinions. Traders can't make a lot of money, but many of them know each other, so the bragging rights are valuable.

You have to have some background in meteorology to participate, which means many of those who sign up are college students and teachers. Participation so far has been modest, at most 40 traders at a time. But the sponsors say the market still provides useful information.

"We can compare what the market is predicting to what the official forecast is predicting," said David Nolan, assistant professor of meteorology at Miami.

Nolan said the speculators and the official forecasters disagreed over the course of Hurricane Ophelia two years ago and the speculators turned out to be right. He said the speculators' own experiences and biases probably played a role in choosing a more conventional path for the storm.

Last year was pretty much a bust with only two storms, Beryl and Ernesto, threatening enough to produce significant trading activity.

At least three other markets offer speculation opportunities open to anyone, but futures contracts on hurricanes are a long way from rivaling contracts on soybeans or currencies.

The Chicago Mercantile Exchange is the best known of the markets, adding its first hurricane contracts this year. In addition to speculators, the exchange hopes the contracts will become a hedging tool for insurance and oil companies and others exposed to hurricane risk.

Only Trade Exchange Network's Intrade market stays open continuously. Others open for trading when a named storm threatens the United States.

"Before I owned a home, I hoped every hurricane season would be very busy," Nolan confessed. "Now that I own a home, my view has changed. But we don't have to have a damaging season to have a good market. It could be a dozen weak tropical storms that make landfall around us."

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.

Hurricane futures trade in these markets, although most aren't active until a named storm forms and sometimes not until the storm is approaching the United States.

The players

Hurricane Futures Market

Miami

hurricanefutures.miami.edu

Contracts: Where a particular storm will make U.S. landfall (16 areas). Trading limited to meteorology students and others with some meteorology background or expertise.

Chicago Mercantile Exchange

Chicago

www.cme.com

Contracts: The strength, based on Carvill Hurricane Index, of a particular storm to make landfall in a particular geographic area (six areas).

HedgeStreet

San Mateo, Calif.

www.hedgestreet.com

Contracts: How much financial damage a particular storm will cause.

Trade Exchange Network

Dublin, Ireland

www.intrade.com

Contracts: Which named storm will be the last of the hurricane season; whether any Category 3 or higher storm will make landfall in a particular state (13 states) this hurricane season.

Hurricane futures trade in these markets, although most aren't active until a named storm forms and sometimes not until the storm is approaching the U.S.

[Last modified August 14, 2007, 23:01:44]