What does Catastrophe Futures mean?
Catastrophe Futures are used / written by the insurance company or reinsurer. When any insurance company sells insurance where the underlying event is a catastrophe, to mitigate a part of their risk they sell Catastrophe Futures. The value of the Catastrophe Future increases when there is an event. The value of such contract will depend on the actual damage. So in case the damage is higher, the cost of such instrument will increase and vice-versa.
Futures Knowledge Explains Catastrophe Futures
Catastrophe Futures are traded in only a few exchanges, therefore is not a widely traded instrument. Only limited firms or individuals participate in the trade in Catastrophe Futures. In most cases, the counter party of such instruments are also specialized insurance firms or individuals who understand the risk associated with such product.