Felix Salmon pushes for Political Event Swaps.

Chris F. Masse May 30th, 2007

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.

Go reading the two comments. And expect JC Kommer to participate in the discussion.