DEFINITION of 'Catastrophe Futures'

Catastrophe futures are futures contracts traded on the Chicago Board of Trade (CBOT). These futures contracts are used by insurance companies to protect themselves against future catastrophe losses. The value of a catastophe futures contract is equal to $25,000 multiplied by the catastrophe ratio for the quarter. The catastrophe ratio is a numerical value proided by the CBOT every quarter.

BREAKING DOWN 'Catastrophe Futures'

Catastrophe futures started trading on the Chicago Board of Trading (CBOT) in 1992. The value of a catastrophe future contracts increase when catastrophe losses are high and decrease when catastrophe losses are low. In the event of a catastrophe, if losses are high, the value of the contract goes up and the insurer makes a gain that hopefully offsets whatever losses that might be incurred. The reverse is also true. If catastrophe losses are lower than expected, the value of the contract decreases and the insurer (buyer) loses money.

RELATED TERMS
  1. Catastrophe Loss Index - CLI

    An index used in the insurance industry to quantify the magnitude ...
  2. Catastrophe Insurance

    Insurance to protect businesses and residences against natural ...
  3. Workers' Compensation Catastrophe ...

    A type of loss reinsurance that is purchased by insurers of workers' ...
  4. Catastrophe Call

    A call provision in municipal bonds that allows for the early ...
  5. Catastrophe Reinsurance

    Reinsurance purchased by an insurance company that reduces the ...
  6. Catastrophe Equity Put (CatEPut)

    Catastrophe equity puts are used to ensure that insurance companies ...
Related Articles
  1. Insurance

    Is Catastrophic Health Insurance Right for You?

    Catastrophic health plans protect you from high medical costs if you get seriously hurt or injured. But when is catastrophic the best option for you?
  2. Investing

    Elements of Insurable Risks: A Quick Guide

    Explore the elements of insurable risk: due to chance, measurable and definite, predictability, noncatastrophic, random selection and large loss exposure.
  3. Investing

    Introduction To Currency Futures

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  4. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  5. Insurance

    The Reinsurance Industry: An Inside Look

    Low demand and high regulatory pressures may be problematic for the global reinsurance market following the shrinking margins and declining demand of the first half of 2016.
  6. Financial Advisor

    Can Long Term Care Insurance Be Affordable?

    The cost of managed care and insurance covering it will only become more expensive. Here's how to help your clients formulate a plan.
  7. Insights

    Explaining Too Big To Fail

    Too big to fail means that a business has become so large that its failure would have catastrophic economic repercussions.
RELATED FAQS
  1. What is Warren Buffett's relation to "Supercat" insurance?

    Understand the concept of catastrophe reinsurance and learn how Berkshire Hathaway makes billions providing such insurance ... Read Answer >>
  2. Why do insurance policies have deductibles?

    Learn the basic concept of an insurance deductible and why they mitigate moral hazards and provide financial viability to ... Read Answer >>
  3. What's the difference between the Chicago Board of Trade (CBOT) and the Chicago Mercantile ...

    Read about the CBOT and Mercantile exchanges; both are futures exchanges that offer different futures contracts and specialize ... Read Answer >>
  4. What types of futures contracts are typically sold on an exchange?

    Explore the wide variety of available futures contracts traded on exchanges, which range from agricultural commodities to ... Read Answer >>
  5. What is the history of futures?

    Explore the history of futures trading and the origin of the major commodity futures trading exchanges in England and the ... Read Answer >>
Hot Definitions
  1. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  2. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  3. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
  6. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
Trading Center