I first heard the idea about hedging risk against actual future disasters (man-made or natural) around the time of Hurricane Katrina.
The essay below by professor Avinash Persaud considers the creation of a terrorism futures market. The ideas are particularly timely in the context of the unrest in Libya and the uptick in oil prices.
Right now, the closest thing we have to “terrorist futures” are crude oil futures. One way of looking at them is as a loose proxy for the sell-by date on the Saudi monarchy. For example, oil prices above $99 would be a function of geopolitical instability, and not just the supply-demand dynamic.
Futures prices convey information in its raw form. They tell you what individual participants are betting on and how they’re evaluating risk. They tell us something about Quaddaffi. Even if Libya is not a major oil producer, Muamer Quaddaffi is a major source of instability.
Can a Country Take out Financial Insurance Against Macro-Risks Like Currency Instability or Global Terrorism?
by Professor Avinash Persaud
Good evening, ladies and gentlemen. I would like to begin today by discussing the link between the personal insurance you and I take out every day and financial futures markets. I will then turn to a proposal to establish a terrorism futures market and how that would work. I will address the moral objections to such a market and its possible benefits to our democracy. It should be a thought-provoking tour.