A type of derivative that is traded on the Chicago Board of Trade (CBOT) giving its holder the right, but not the obligation, to exercise on a catastrophe futures contract. That is, this option is essentially a call option spread purchased usually by insurance firms on catastrophe futures contracts. The underlying asset of this call option, that can be long or short, is a catastrophe contract. The same number of calls should be simultaneously sold or bought (i.e., short or long) at a higher exercise price. In this sense, a cat spread helps insurance firms hedge the risk involved in their coverage of catastrophic events.
Derivatives
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