The contracts allow traders to take a position on whether a named storm will cause insurable damages greater than $25 million, $100 million or $1 billion, as determined by the Insurance Services Office.

Mr. Rosenstreich said that although the 2006 Atlantic Hurricane season was relatively quiet, “our pioneering contracts accurately forecasted the amount of insurance damage from Hurricane Ernesto, the one storm to hit the mainland.”

“These can be used as an alternative to traditional insurance policies by going into the market and custom tailoring your needs directly to the risk,” he said.

Since insurance policies will not cover damage stemming from water, such contracts can act as an effective supplement, according to HedgeStreet.

For example, a $100 contract predicting a storm will come in at over $1 billion could cost around $20, while one predicting it will come in at over $25 million could cost $80 with the buyer keeping the difference between the cost and the $100.

Storms come into play once they are named. For example, last year Ernesto was named on August 25.

Mr. Rosenstreich said “the $100 million strike traded heavily from Aug. 28, 2006 through Aug. 30, 2006 and started at $18 on Aug. 28, 2006, moved up to $25 on Aug. 29, 2006 and then fell to $15 on Aug. 30, 2006 as a weakened Ernesto made its third landfall in Miami-Dade County and was subsequently downgraded to a tropical storm.”

Trading in the weather derivatives is regulated by the government.