The CME Tornado Index Futures contract is cash settled. The dollar value of one CME Tornado Index Futures contract is the product of the CTI index and the futures contract multiple of $1,000.
The CTI Tornado force measure takes two input variables: the average wind speed of a Tornado (in miles per hour) and the radius of the base of the Tornado force winds (in miles).
For the Tornado Index Futures contract, the CTI index is the sum of the CTI values for all Tornados which make landfall between Texas and Nebraska. If twenty tornados hit with an average CTI value of 4, then the CTI index is 20 * 4 = 80 and the CME Tornado Index Futures contract value is 80 * $1,000 = $80,000.
The contract is cash settled, so at the settlement date, cash is exchanged between losing and winning counterparties to settle the contract.
You are planning to travel to the New Orleans in the coming months. However, the trip is right in the middle of tornado season. You are worried that a tornado will ruin your vacation. To hedge the risk, what position should you take in the CME Tornado Index futures contract?
◦ Short
◦ Long
Example of the Index to External Causes.
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