The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookiesbefore using this site. Please see our Subscription Terms and Conditions.

All material subject to strictly enforced copyright laws. © 2022 Euromoney, a part of the Euromoney Institutional Investor PLC.

Property derivatives: Is this panic?

by Kanak Patel, Magdalene College, Cambridge.

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.

Under a scenario analysis of loss given default equal to 100%, and the index return volatility of around 30%, the fair spread for a one-year TRS done with a counterparty rated with a Caa-C rating is around 140bp. The IPD indices have displayed relatively low risk compared to stock markets indices, with corresponding high-risk adjusted return. From the end of 2006, we have observed a shift in the market sentiment. The three-year swap mid-price spread has been steadily declining, which suggests that investors are expecting a cooling off of the property market. The mid-price of the contract in February was negative, implying that the underlying index of the contracts is expected to have a return below Libor.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.


Unlimited access to and

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually


Unlimited access to and, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors


Already a user?