Case Study
Hedging Gulf Coast hurricane exposure with a defined-trigger contract
How an energy infrastructure operator converted an open-ended seasonal exposure into a fixed-cost, fixed-payout position ahead of the 2026 Atlantic hurricane season.
Representative transaction. Counterparty details are anonymized and certain terms are simplified for illustration.
The counterparty
The counterparty operates energy infrastructure on the US Gulf Coast. Revenue is throughput-linked. When a major hurricane approaches, ports close, vessels divert, and facilities shut down for pre-storm evacuation and post-storm inspection, whether or not the assets take physical damage.
Its property program covered physical damage. Shutdown costs, throughput interruption, and costs from a near-miss storm were largely uninsured. Every season, the balance sheet carried a deductible it would have to absorb and a revenue exposure no policy addressed.
The problem with available hedges
The desired position was simple: a fixed payment if a severe hurricane made landfall in its operating footprint during the 2026 season. None of the standard instruments delivered it cleanly.
Indemnity insurance
Priced for physical damage. Non-damage business interruption was excluded, and recovery required a claims and adjustment process measured in months.
Parametric insurance
Closer in spirit, but placement timelines and minimum program sizes did not match a single-season, single-trigger need.
Listed markets
No instrument tracks Category 4+ landfall. Equity and commodity proxies embed spread, basis, and market risk unrelated to the storm itself.
The structure
Discrete quoted a regionalized US hurricane landfall contract. Narrowing the trigger to the counterparty’s operating footprint aligned the payout with the exposure.
- Structure
- Binary event contract, bilateral.
- Trigger event
- A hurricane makes landfall on a defined stretch of the US Gulf Coast at Category 4 or higher on the Saffir-Simpson Hurricane Wind Scale.
- Observation period
- Execution through November 30, 2026.
- Reference source
- National Hurricane Center advisories, with the governing publication for determination fixed in the contract.
- Payout
- Fixed amount agreed at execution, sized to the exposure it replaces.
- Premium
- Paid at execution. A known, budgeted seasonal cost.
- Settlement
- Cash, within five business days of determination.
Execution
The trigger definition, the governing data source, and the settlement timeline were all fixed in the contract before the season’s peak months began.
Once executed, the position asks nothing of either side. No margin calls, no mark-to-market disputes, no adjustment process. The contract either triggers or it expires.
Settlement mechanics
If a qualifying storm makes landfall within the observation window, the National Hurricane Center classification determines the outcome and the fixed payout arrives within five business days, while the counterparty is still absorbing shutdown costs rather than months later.
If no qualifying landfall occurs by November 30, the contract expires and the counterparty’s cost is the premium. It works like an insurance premium, with one difference that matters: the determination process never requires proving a loss.
The economics
The value of the hedge is not a discount. It is a cap. The unhedged season carries an open-ended tail; the hedged season costs the premium.
- Maximum cost of the season
- The premium, fixed and paid at execution. The position cannot cost more than it did on day one.
- Payout if triggered
- $10,000,000 (illustrative) — a fixed multiple of the premium, sized to the deductible and shutdown exposure it replaced.
- Recovery on the payout
- Face amount in full. No deductible, no exclusions, no adjustment haircut.
- Time to cash
- Within five business days of the NHC determination, while shutdown costs are still being absorbed — not at the end of a claims process measured in months.
- If no storm qualifies
- The contract expires at zero. The cost of the season was the premium: known, budgeted, and final.
What this illustrates
The exposure was real but unlisted
No exchange-traded instrument isolated the risk that actually drove the counterparty’s P&L.
The trigger was defined to the footprint
A bespoke contract can narrow a nationwide event to the region that matters, reducing basis to the exposure that is actually retained.
The economics were fixed upfront
Premium, payout, data source, and settlement timeline were all known at execution.
Settlement requires no loss adjustment
A public classification by a federal agency determines the outcome. There is nothing to negotiate after the event.
The pattern
Most Discrete contracts follow the same sequence. Identify the variable that actually drives the exposure, define it against a public data source, and fix the terms before the event window opens. The instrument changes, from hurricanes to temperature thresholds to route closures to grid events, but the structure does not. If a seasonal exposure like this one sits on your balance sheet, we can walk you through what the equivalent contract would look like.
Evaluating a specific exposure?
Contact Discrete for institutional inquiries.