You Want to Diversify Risk?

Abstract

Economic derivatives markets offer new risk diversification opportunities for individual investors, covering factors such as inflation, real estate, hurricane damage or gas at the pump. Because these contracts tend to be written on unhedgeable underlying assets or variables, valuation and pricing are not straightforward. This article provides an overview of valuation approaches and shows that most contracts in these nascent markets are efficiently priced.

TOPICS: Derivatives, portfolio theory, risk management, performance measurement