Real Estate Derivatives

A real estate derivative is a financial instrument whose value is based on the price of real estate. The core uses for real estate derivatives are: hedging positions, pre-investing assets and re-allocating a portfolio. The major products within real estate derivatives are: swaps, futures contracts, options (calls and puts) and structured products. Each of these products can use a different real estate index. Further, each property type and region can be used as a reference point for any real estate derivative.

The most basic form of real estate derivative is a swap transaction, in which one investor, or one side, goes long and the other side goes short (finance). An investor would want to execute a swap if they thought that the market, or sector, was likely to appreciate, in which case they would go long. Alternatively, if an investor’s view was that the market would depreciate from that point, they would go short, or take the other side of that trade.

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