Prediction Markets Offer Businesses a New Way to Hedge Shipping and Weather Risks

Prediction markets are beginning to fill gaps in business risk transfer, particularly where traditional insurance and derivatives offer limited options. Small companies can use event contracts to take positions on shipping costs, tariffs and weather. The potential is real, but so are the limits: a market payout may not match the financial loss, and the contract must settle reliably.

Shipping costs and tariffs draw early interest

James Fayal, whose Baltimore-based business Zest sells Asian tea around the world, faces volatile freight expenses and shifting tariff conditions. He used Kalshi to bet that President Donald Trump would impose a tariff on Canada. The payout helped offset some lost sales to a Canadian customer.

Fayal later worked with Kalshi to create a contract linked to a Shanghai shipping index. It pays if container shipping costs cross specified thresholds, giving his company a way to offset a rise in freight expenses. The arrangement points to a gap between the tools available to large companies and those within reach of smaller operators. As Fayal put it, a company such as Procter & Gamble could arrange forward contracts for thousands of containers to lock in rates, while that option isn’t readily available to a small business.

Other businesses are testing similar approaches. Kalshi users include a kayak tour operator looking to offset rainy-day cancellations, an ice cream shop owner exposed to cold weather that can suppress sales, and an online farmers market facing heat damage to crops. These examples show why event contracts may attract firms with concentrated exposure to risks that are too small, unusual or difficult to model for conventional coverage.

Contracts trade directly on an event

Kalshi’s contracts resolve to either $1 or $0, depending on whether a specified real-world outcome occurs. A correct prediction earns the difference between the contract’s $1 payout and its purchase price, less fees. An incorrect prediction loses the amount invested. Traders can also sell before the event is decided.

Kalshi was founded in 2018 by Tarek Mansour and Luana Lopes Lara, who had worked at firms including Goldman Sachs, Citadel and Bridgewater. Mansour’s experience building derivatives for clients seeking protection from the 2016 Brexit vote helped inspire the platform, according to Nicolas Hull, Kalshi’s head of business development in New York.

The exchange, widely known for sports-related markets, also lists contracts tied to politics, commodities, economics and finance. It has recently allowed eligible contract participants to negotiate large private transactions for execution on the exchange, known as block trades. Those trades currently require at least 25,000 contracts. Kalshi’s handbook outlines 50 possible uses for companies in sectors such as real estate, retail and health care.

Interactive Brokers’ ForecastEx, based in Greenwich, Connecticut, offers event contracts tied to both catastrophic and less severe weather. Patrick Brown, the company’s head of climate analytics, said these contracts provide a more direct structure than weather derivatives and more efficient price discovery than parametric insurance.

Speed can help, but matching losses remains difficult

Event contracts can be traded as conditions change, giving companies a way to respond closer to the time a risk materializes. Robert Hartwig, director of the Risk and Uncertainty Management Center at the University of South Carolina, said that timing can offer an informational advantage over insurers, which often set rates months in advance.

Hartwig illustrated the idea with a personal example. After taking a large deductible on wind coverage for his home, he made a classroom bet on Kalshi that hurricane activity would be below normal that season because of El Niño. He said he had more information as hurricane season approached than insurers had when setting their terms.

ForecastEx also lets customers trade contracts on wind gusts within a 10-kilometer radius of dozens of U.S. population centers as a storm approaches, Brown said. A business that correctly predicts a storm’s impact could use the payout to help cover its property insurance retention. The product offers another potential way to transfer risk on a more frequent and flexible schedule.

Market information may also prove useful even when a company doesn’t trade. Michael Gruetzmacher, Aon’s head of alternative risk, said risk managers could consult prediction markets to assess major events that are difficult to insure, including midterm election outcomes. He described the markets as a source of feedback.

Tom Markovic, Marsh’s global head of parametric solutions, said insurers often avoid regulatory, legal and supply chain exposures because they can be systemic or hard to model. Prediction markets could bring in another source of risk-bearing capital, including hedge funds willing to speculate for profit. Whether that capacity can support dependable business hedges will depend on the contracts and the market behind them.

Reliability and basis risk remain central concerns

For corporate users, a market’s ability to attract participants and settle contracts clearly matters as much as its headline payout. Experts warn that an event contract may not compensate for the loss a business actually experiences. That mismatch, known as basis risk, can arise when a broad event—such as an interest-rate increase—affects individual companies in different ways.

Rob Hoyt, a risk management professor at the University of Georgia, said predicting how an economic event will affect a particular business is difficult. Insurers, by contrast, specialize in estimating the financial impact of adverse events. A contract tied to a public index or a yes-or-no outcome may therefore be easier to trade than to align with a company’s actual exposure.

Confidence in contract terms and resolution is another unresolved issue. Kalshi has canceled contracts after disputes over wording, including markets tied to the duration of the 2026 government shutdown, the timing of the death of Iran’s Ayatollah Ali Khamenei, and rapper Cardi B’s appearance at the Super Bowl. Kalshi and rival Polymarket have also faced allegations of insider trading and market manipulation. Polymarket has been criticized over the reliability of its UMA dispute process, while several states have sought to shut down Kalshi by classifying it as a sports betting site requiring a gaming license.

Those disputes sit uneasily beside the certainty businesses expect from insurance. Nick Martin, Alliant’s alternative risk transfer lead in Atlanta, said the core question is whether users can count on receiving payments and covering their downside. Until contract rules, liquidity and settlement prove dependable, prediction markets are likely to serve as targeted tools for some exposures rather than a broad substitute for established risk transfer.

Still, business owners such as Fayal will keep looking for ways to manage risks that remain outside standard coverage. He described the experience of running a small consumer products company exposed to freight and international supply chains since 2021 as “hellish.” For firms in that position, event contracts may offer a practical experiment—but the hedge is only as useful as its fit with the loss and its ability to pay when the event resolves.