Lots of politicians blasted the proposed terrorism futures market last summer, mainly because they didn't understand it. But if there's one thing even harder to predict (and more expensive to get wrong) than terrorism, it's the weather -- and weather futures are proving very popular among weather-dependent industries.
The weather futures market allows companies to hedge against weather that will adversely affect their business. For example, a company that sells heating oil will have a bad year if the winter is warmer than normal, but they can offset those losses by buying warm-weather contracts that pay off as the temperature rises. In a sense, it's a form of distributed insurance without all the overhead of dealing with an insurance company. The net effect is that when the weather is good you make less profit (because you get stuck with losing contracts), but when the weather is bad you lose less money. This serves to smooth out the cash-flow of your company, which any businessman will tell you is a Good Thing.
Apparently, weather futures are also accurate predictors of the weather:
Energy companies often have access to in-house or private weather forecasters, and a futures market gives them incentive to act on, and thereby reveal, such information in weather futures pricing, natural gas futures analyst Vishu Kulkarni said in a report.Now imagine some possible uses for a terrorism futures market. The owners of a high-profile potential target could buy contracts that pay off if their property is destroyed, thus saving their business and helping them rebuild. This would relieve a lot of pressure from the public (which is otherwise left holding the bag), and will serve to "insure" against events no insurance company would want to touch. The costs and payoffs would be entirely market-driven, and could operate with very low overhead.
What's more, by giving people with inside knowledge a way to make money off their information, they'll have an incentive to reveal it. That may sound macabre, but the government offers rewards for information on terrorist activities already, and this would be no different. Of course, once a contract for a particular date and location went up in price, law enforcement could begin working to thwart the threat, thereby reducing the odds the contract would pay off. That effect would lead to some interesting interplay, and I'm not sure how it would shake out.
