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Speculating on Extreme Weather? Harder Than You Might Think

As Hurricane Sandy approaches the New York,  the New York Stock Exchange has closed, shut down by weather for the first time since a Hurricane Gloria, 27 years ago (a decision perhaps helped along by the fact that New York has shut down the subways and evacuated parts of downtown).

Already responsible as of yesterday for 65 deaths in the Caribbean, the hurricane is now threatening much of the East Coasr. In addition to considering the human toll, it's worth thinking about the more general question of how the market handles the "fat tail" risk of a major hurricane. The National Weather Service's excellent hurricane map shows a 30% to 40% risk (that's the yellow band in the map above) of 50-knot (58-mph/93-kmh) winds in New York.