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Great Minds think alike III

Dear friend,

Great minds certainly do think alike —don’t they?

The news that Carvill has teamed up with the Chicago Mercantile Exchange (CME) to market US Hurricane Cat futures and options is certainly evidence of that!

The move comes incredibly soon after the Gallagher Re-Nymex announcement , and the bonds will start trading only a week later on 12th March.

I’ve spoken to and met the people behind both of these developments in the last two weeks and am mightily impressed.

What is heartening is that the two sets of contracts are different from each other and should compliment each other rather than slit each other’s throats in the race to build market liquidity.

The key numbers the Gallagher Re contracts trade against are annual property losses from named perils in certain US territorial zones whilst the Carvill ones are based on the size, radius and intensity of the next landfalling hurricane to hit each zone.

The Carvill ones will settle 3 days after a hurricane makes landfall — how’s that for a speedy claims settlement?

So it’s a question of you pay your money and you take your choice — of course, both contracts will contain basis risk (which is the “oh darn” risk of buying a load of contracts, sustaining a heavy loss and the contracts not paying out).

But talking to the brains behind this, one thing that emerged was the impeccable chain of security involved in laying off risk through an exchange. If you buy through a broker, you get the broker’s security, plus the exchange’s — and these exchanges hold billions in cash in the form of margin calls. It’s pretty safe.

All we need to do is sell “wrap” covers to take the basis risk away and we’re really in business.

Anyone want to step into the breach on that one?

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