Property derivatives (I love my work)

Last two weeks had been highly hectic and extremely busy for me...I had been working 14 hrs a day...(office+home) as a project had suddenly cropped up on "Property derivatives". Looking at my knowledge databank I had read about equity derivatives and commodity derivatives and had a fair idea about them. However, i had no idea what a property derivative would be like. The concept was a little new to me with loads of questions popping in my head such as "How can property have derivatives? Property market is so unorganized? How can we have a common basis to value property and all? Who would buy these drivatives and so on and so forth...

However, when i started researching on my project all my questions were answered one by one. While doing this project i was surprised to see that the property derivatives had been used successfully over the past 3 years to hedge risks, reduce sectoral exposure, invest in a timely manner and all that. Property derivatives is just like any other derivative tool (equity or commodity or weather or energy, etc).

The only difference is that it is property a fixed asset and not something that is notional like a stock that derives its value from market sentiment on the stock exchange...So property has an edge over the fictional stock...

So this investment instrument has proven to be a handy and a very effective tool for investors to invest in a market unlike actual physical property which involves complications such as valuation of property, clearance of legal titles, regulations, etc (the list seems never-ending).

On a closer look I discovered that UK was the major center for the property derivative trades followed by US and European countries. UK forms approx 90% of the trades with majority of the investors as banks who hedge their loan values through property derivatives.

Going forward, I found that not only banks but also pension funds, hedge funds, insurance companies, HNWI and property developers also participate in this market to protect themselves from price risk (through hedging), extreme sectoral exposure (too much concentration on retail, commercial or residential property) and an economic downturn (the downturn as a result of the sub prime crisis in the USA).

Therefore, Investors have used property derivatives extensively in the Westren countries to hedge risks, reduce sectoral risk and invest in a timely manner.

The trend is still picking speed and is expected to reach India within a decade or so... (Sorry guys can't share too much about this segment as it is against our company policies so have shared minimum but comprehensively)... :(