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The Fate of Extraordinary Aliens Und...   Dsquared on Political Event Swaps
May 29 2007 4:15PM EDT

It's Time for Political Event Swaps

The time has come for political-event swaps, even if Alexander Campbell is dubious about the idea. I think that a swaps market makes more sense than a futures market, in this case. Basically, companies with political-event risk get to hedge it, while hedge funds and other investors get to invest in an asset which is completely uncorrelated with anything else.

Let's say that you're a company which receives enormous government subsidies -- ADM, say. You're worried that when the next president is elected, those subsidies will be slashed. So you write a swap agreement with a hedge fund, based on a nominal $100 million, say. You pay the hedge fund 7% of that $100 million per year, or $7 million. In return, the hedge fund will pay you out the full $100 million if and when your government subsidies ever fall below a certain level. The swap has a maturity date, of course, at which point both parties' obligations cease.

A market in that kind of swap makes perfect sense: it takes risk away from companies who don't want it, and gives it to investors who do want it. I'm just surprised it hasn't happened yet.

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