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HedgeStreet launches hurricane damage contracts

HedgeStreet's vice-president of marketing, Bill McIntosh, said: "Our intention is to build this market into a valuable resource for mitigating storm damage risk."

The exchange is launching two classes of contracts. Both are binary and carry a $100 payoff. Season contracts have a strike price based on the total estimated losses from the 2006 hurricane season, which ends on November 30. Named storm contracts are based on the damage caused in the US by a specific named hurricane or tropical storm.

Season contracts are trading at $100 million, $1 billion, $10 billion and $25 billion. Tropical Storm Debby, named earlier this week, is also trading named storm contracts at $25 million, $100 million and $1 billion, although the market is bearish – a reflection of the fact that Debby is not predicted to make landfall in the US.

However, HedgeStreet said its pricing predicted an 18% chance of damage greater than $25 billion this year – a boundary only reached twice since 1991.

Damage will be assessed by the Insurance Services Office, a US provider of property and liability risk information.
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