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
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.