Hedging Real Estate Risk

Abstract

A number of real estate derivatives are available worldwide. The authors discuss the issues related to the pricing of these instruments and to the managing of hedging instruments over time. The property derivatives are classified by the type of real estate risk they hedge: 1) housing price risk, 2) commercial property price risk, and 3) mortgage loan portfolio amortizing risk. Given the special characteristics of the real estate asset class—an incomplete market, difficult to hedge, and reversion to a long-term trend—the authors emphasize the main points that should be taken into account when pricing property derivatives.