Exchange traded catastrophe options

Standardized contracts that give the purchaser the right to a cash payment if a specified index of catastrophe losses for a specific period reaches a specified level - the strike price. An insurer that wants to use this form of securitization to hedge catastrophe risk can buy catastrophe options from investors. If catastrophe losses cause the index used in settling a catastrophe option to equal or exceed the strike price specified in the option, the investors must pay the insurer an amount based on the terms of the contract.