The bid-offer spread on IPD total return swaps (TRS) is a useful window in to the future for investors who seek to actively manage their exposure to property market risk. The massive convergence from 200bp to 280bp last summer to 20bp to 50bp seen recently on a December 2011 contract is an astounding development. According to a recent study by Kanak Patel and Ricarado Pereira at Cambridge University, Pricing property index-linked swaps with counterparty default risk, the fair spread on TRS depends largely on the volatility of the underlying real estate index.
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