Options bought by SPV's oblige investors to compensate the
issuer - an insurance or reinsurance company - if damages exceed the
strike price. Weather derivatives have taken off during the recent
volatility in gas and electricity prices in the USA.
The bullish outlook of some re-insurers notwithstanding, the market is
tiny - less than $1 billion annually - and illiquid. A CATs risk index
is published by and option contracts are traded on the Chicago Board of
Trade (CBOT). Options were also traded, between 1997 and 1999, on the
Bermuda Commodities Exchange (BCE).
Risk transfer, risk trading and the refinancing of risk are at the
forefront of current economic thought. An equally important issue
involves "risk smoothing". Risks, by nature, are "punctuated" -
stochastic and catastrophic. Finite insurance involves long term, fixed
premium, contracts between a primary insurer and his re-insurer. The
contract also stipulates the maximum claim within the life of the
arrangement. Thus, both parties know what to expect and - a usually
well known or anticipated - risk is smoothed.
Yet, as the number of exotic assets increases, as financial services
converge, as the number of players climbs, as the sophistication of
everyone involved grows - the very concept of risk is under attack.
Pages:
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91