The 2007 Hurricane Futures Markets (HFM)

On July 1, 2007, the Iowa Electronic Market will open trading in contracts based on the track followed by Atlantic Basin Cyclones during the 2007 season. This document describes these contracts and the structure of the market in which they trade.

Contracts to be traded on HFM are based on the center position at the point of first landfall along the U.S. mainland coastline of named Atlantic Basin tropical cyclones, which may be hurricanes, tropical storms or tropical depressions at the time of landfall. The National Hurricane Center (NHC) will be the official source for the names of cyclones, the classification of the strength of the named storms, and of the location of their landfall. Shortly after a storm is named by the NHC a market will be opened for that storm. Each contract listed for that storm will represent a unique landfall location, and the full set of contracts traded will represent an exhaustive set of locations. Trading in the contracts will continue from market open until after the storm makes landfall or dies out, at which time they will be liquidated. They will be "Binary Contracts", meaning there are two possible liquidation values, $1.00 and $0.00, for each contract. The contract in a set that denotes the actual landfall of that storm will have a liquidation value of $1.00; all other contracts for that storm will have values of $0.00.

Contracts will be identified according to the convention "XXX_LS", where XXX is a three digit abbreviation of the storm name and LS is a landfall section code, as identified in the tables below. The contracts to be introduced initially for each storm will depend on the location of the storm at the moment it is named (see map). Atlantic Coast storms are those located north and east of the imaginary line extending from the southern tip of Florida (25.25°N, 80.30°W) through the Lesser Antilles (15°N, 65°W) and beyond. Specifically, a storm is designated an Atlantic storm if it forms east of 80.3°W and its latitude satisfies the inequality: latitude > 10.25 * (longitude - 65) / 15.3 + 15.0 . Gulf Coast storms are those forming west of 80.3°W or south of that same line when they are named. Click on the map at the right for a larger version in a new window. Choose the links below for blowups of the Atlantic and Gulf sections. Atlantic Sections       Gulf Sections The landfall ranges to be used for contracts are as follows:

Two events will lead to the close of a market for a storm and declaration of liquidation values. The first is a U.S. Landfall, with the storm hitting the U.S. coastline from the sea. And the second is expiration of the storm before making U.S. landfall. "Landfall" means the intersection of the surface center of a tropical cyclone with part of the U.S.coastline, as it is reported by the NHC. In all cases, "U.S. landfall" refers to the mainland coast of the U.S., and its barrier islands, not to a distant island or other land far off of the coast. For example, Miami Beach or the Florida Keys could be a U.S. landfall but Puerto Rico, the U.S. Virgin Islands and the Dry Tortugas could not. Landfall presumes a a named storm of tropical depression strength or greater at the time it reaches land. A storm is defined to "expire" when the NHC issues its final advisory for that storm whether it still over the ocean, or over non-U.S. land. Therefore, landfall over non-U.S. territory does not indicate close of the market, unless the final NHC advisory is issued. If the reported landfall is exactly at the midpoint between two segments, it will be presumed to have landed in the segment on the left (west or south).

For example, on August 9, 2004 a tropical storm located near latitude 13.0° N, longitude 66.3° W was dubbed Charlie. Over the next five days the tropical storm strengthened into a hurricane, and it struck land on August 14 on near Charlotte Harbor, Florida, with the center located near latitude 26.9° N, longitude 82.2° W. Had the HFM operated for the 2004 season, the storm would have been classified as a Gulf Storm because of its initial location. Shortly after the August 9 announcement of the named storm, a CHArlie market would have been opened, with eighteen contracts listed in that market -- Cha-G1, Cha-G2, ..., Cha-G16, Cha-GX and Cha-GN. After landfall had been announced on August 14 by the NHC, all outstanding holdings of the Cha-G13 contract would have been liquidated at $1.00 each, while shares of the remaining 17 contracts trading in the market would have earned $0.00.

The Managers of the HFM project reserve the right to introduce new contracts to ongoing markets as spin-offs of existing contracts. When a contract spin-off occurs, an original contract will be replaced by new contracts which divide the payoff range of the original contract into sub-intervals. For example, if Hurricane ZZZ is spawned west of the Miami-Lesser Antilles line, the initial contract listing will include ZZZ-G1, ZZZ-G2, ZZZ-G3, ..., ZZZ-G16, ZZZ-GX and ZZZ-GN. If the storm turns abruptly north making a gulf coast landfall very unlikely, the ZZZ-GN contract might be replaced by (spun off into) 17 new contracts, ZZZ-A1, ZZZ-A2, ZZZ-A3, ..., ZZZ-A16 and ZZZ-AX. The market will then continue until closing with thirty four contracts listed and traded. No holder of the pre-spin-off contracts will be adversely affected. Traders will receive the same number of each of the new contracts as they held in the original, and the sum of the liquidation values of the new contracts will equal the liquidation value that would have been paid to the original in the absence of a spin-off. Decisions to spin-off a contract will be announced as far in advance of the spin-off as possible. The new contract names, the specifications regarding liquidation values and the timing of the spin-off will be included in the announcement. This announcement will appear as a News Bulletin on the WebEx login screen.

Fixed-price bundles consisting of one share of each of the contracts in the market for a named storm can be purchased from or sold to the trading system at any time. The price of each bundle is $1.00. Contracts listed in a market at any point in time will represent a mutually exclusive and exhaustive set of landfall location possibilities. One and only one of those contracts will coincide with the actual landfall location of the storm. Therefore, the total payoff from holding a bundle consisting of one of each contract until the market closes is $1.00, the same as the fixed price of the bundle. As a result, purchases and sales of bundles carry neither risk of loss nor prospect of profit.

To buy or sell fixed-price bundles from the exchange, use the "Market Orders" option from the trading console. Select the option "XXX_$1 (buy at fixed price)" from the Market Orders list to buy bundles, where XXX is the 3 digit abbreviation of the storm name. Select the "XXX_$1 (sell at fixed price)" option to sell bundles. Purchases will be charged to your cash account and sales will be credited to your cash account.

New markets will be opened as soon as possible after the announcement by the NHC of the name of a new storm; generally the opening will occur within six hours of the announcement. Trading in the set of contracts for a given storm will close shortly after the NHC announces a U.S. landfall or announces that it has issued the final advisory for that storm. As soon thereafter as possible, liquidation values will be declared and funds credited to the cash accounts of market participants.

Participation is restricted to registered traders, and registration is by invitation from the market managers only. Each registered trader is given an account with an initial balance of $100. Purchases of contracts are charged to that account; sales and contract liquidations are credited to it. Funds in the account are fungible across storms. Conditional on sufficient trading activity, the balance remaining in the account at the end of the 2007 hurricane season will be distributed to the holder of the account. No funds may be withdrawn from the account prior to that final disbursement

For traders with open accounts, access to the market is achieved by pointing a web browser to http://iemweb.biz.uiowa.edu/trader-login.html and following the login instructions found there.

Transactions on the 2007 Hurricane Futures Market are executed directly by the trader using a real-time web based system operating over the Internet. The system, called Web Exchange (WebEx), is maintained by the Iowa Electronic Markets project in the University of Iowa's Tippie College of Business. To access the trading system, an enrolled trader uses a web browser on any computer connected to the Internet. The URL for trader access to the market itself is http://iemweb.biz.uiowa.edu/trader-login.html. The instruction manual for the use of the trading system is at http://iemweb.biz.uiowa.edu/webexmanual/index.html. The market operates in the Central time zone and is open for trading around the clock.

Trading rules for this market are the same as those specified in the Trader's Manual for the Iowa Electronic Market. This Prospectus should be viewed as a supplement to that Trader's Manual.

The judgment of the HFM managers will be final in resolving such issues as interpretation of NHC announcements, contract spin-off decisions, market open and close times, and questions arising from typographical or clerical errors.

The Hurricane Futures Market is a collaborative research project involving faculty members from the University of Iowa Tippie College of Business and members of the faculties of the University of Miami School of Business and the University of Miami Rosenstiel School of Marine and Atmospheric Science.

Contact information for University of Miami members of the research team can be found on the project web site, http://hurricanefutures.miami.edu/. The IEM home page http://www.biz.uiowa.edu/iem/ contains more information about the Iowa Electronic Market and contact information for members of that group.

The Hurricane Futures Market is an experimental research tool and is not a hurricane track forecast. Individuals seeking information on tropical cyclones, including hurricanes, should contact the National Hurricane Center. For the official National Hurricane Center forecasts, go to their website at http://www.nhc.noaa.gov.