Wednesday, December 14, 2011

Thailand Using Financial Markets To Minimize Damage Risks Where US Would Regulate Activities Instead

Thailand is suggesting it will allow flood related futures trading to hedge the risk of damage from flooding. Thailand appears to understand its economy and financial markets in a way that the US does not; markets are a risk transference mechanism -- not a risk avoidance mechanism without losses.

Futures and other derivatives are a zero sum investment. For one investor to show a gain, another investor, the counter-party, must show a loss. Hedgers in flooded areas will be compensated for their losses at the expense of counter-parties to the futures transactions.

Thailand will allow the markets to deal with the risk of damage from flooding, unlike the US approach of attempting to regulate away the risk by dictating and limiting what activites, how and where can be conducted in a flood prone area.

Also, Thailand will avoid the need to provide subsidies for flood plain insurance and catastrophes, as is done in the US through its flood plain subsidies.

From Bloomberg, "Thai Floods May Prompt Water Futures Trading" by Anuchit Nguyen:
Thailand may start trading of water derivatives, giving investors a means of hedging against disasters after the nation’s worst floods in almost 70 years, the [Thai] Securities & Exchange Commission said.

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