Sep 14, 2005

UK Property Derivatives Market

From the FT:
Major players in the financial services industry are to partake in a trading game in property derivatives starting next month in a drive to accelerate the development of the market in the UK.

The initiative, which is being spearheaded by Hermes, the investment fund, is intended to give investors, property companies and investment banks the chance to gain practical experience in trading derivatives in a realistic environment – but on a virtual basis. The exercise is also aimed at gauging the level of potential demand.

Derivatives are financial instruments that effectively allow investors to bet on the direction of a particular market. A property derivative would give investors and companies exposure to the sector without having to own bricks and mortar. Buying derivatives is also often quicker and easier than physical property transactions.

Now that is interesting. I have believed for a very long time that with the massive amounts of wealth tied up in real estate and the normal concentration of risk by geography that a derivatives market was overdue in the sector. I am not familiar with the particulars of the contracts but it will be interesting to see how increased derivatives trading will impact the underlying market.

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