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Thursday, June 02, 2005

Short-Selling Real Estate (via The Big picture)

It's been argued that the inability to short-sell residential real estate could be one of the factors that differentiate real estate bubbles from stock market bubbles. Not any more. The Chicago Mercantile Exchange (CME) already has a letter of intent to introduce derivatives contracts based on housing price indices (they're being developed in conjunction with Macro Securities LLC, a firm associated with Robert Shiller).

However, Hedgestreet.com has already started trading contracts in this market, called "hedgelets". These contracts allow individuals to trade contracts based on housing indices in selected major metropolitan markets (at present, Chicago, New York, Los Angeles, Miami, San Diego, and San Francisco).

The two contracts are based on different indices. Other than that, I'm not sure what the differences are. Watching the development of new ways of spreading, shifting, and pricing risk management tools is always interesting, particularly when there are multiple instruments and vendors in play. Competition is an extremely important part of the process of financial innovation.

Hat tip to The Big Picture for the link.

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