Possible Applications of Derivatives

Abstract

There is a great instrument to diversify a real estate portfolio quickly and cost effectively: Derivatives on real estate indices! Furthermore, derivatives have a very important hedging function. The global financial crisis has underlined the importance of better risk management. Consequently, hedging and the targeted reduction in exposure will be more used. This can be achieved with derivatives on real estate indices. Real estate investors may use derivatives to expand or reduce the allocation in certain markets and sectors. For example, investors may reduce the share of the German retail sector in their portfolio while they increase the share of French office properties. These possibilities to scale the risk exposure will make real estate derivatives an important instrument in the toolbox of portfolio managers. The availability of standardized real estate derivatives through Eurex and of custom-made real estate derivatives on the OTC market enables institutions to fine tune their real estate commitments. Consequently, with all the potential advantages, one might conclude that in the near future it will have become as much a standard to use derivatives on real estate indices to hedge against market risks, as it is now standard to use derivatives on currencies to hedge against exchange rate risks.