| In October 2002, Goldman Sachs and
Deutsche Bank{{U}} (1) {{/U}}a new electronic market (www. gs.
com/econderivs) for economic indices that{{U}} (2) {{/U}}substantial
economic risks, such as nonfarm payroll (a measure of job availability) and
retail sales. This new market was made possible by a{{U}} (3)
{{/U}}trading technology, developed by Longitude, a New York
company providing software for financial markets,{{U}} (4) {{/U}}the
Parimutuel Digital Call Auction. This is "digital"{{U}} (5) {{/U}}of a
digital option: ie, it pays out only if an underlying index lies in a narrow,
discrete range. In effect, Longitude has created a horse race, where each
"horse" wins if and{{U}} (6) {{/U}}the specified index falls in a
specified range. By creating horses for every possible{{U}} (7) {{/U}}of
the index, and allowing people to bet{{U}} (8) {{/U}}any number of
runners, the company has produced a liquid integrated electronic market for a
wide array of options on economic indices. Ten years ago it was{{U}} (9) {{/U}}impossible to make use of electronic information about home values. Now, mortgage lenders have online automated valuation models that allow them to estimate values and to{{U}} (10) {{/U}}the risk in their portfolios. This has led to a proliferation of types of home loan, some of{{U}} (11) {{/U}}have improved risk-management characteristics. We are also beginning to see new kinds of{{U}} (12) {{/U}}for homes, which will make it possible to protect the value of{{U}} (13) {{/U}}, for most people, is the single most important{{U}} (14) {{/U}}of their wealth. The Yale University-Neighbourhood Reinvestment Corporation programme,{{U}} (15) {{/U}}last year in the city of Syracuse, in New York State, may be a model for home-equity insurance policies that{{U}} (16) {{/U}}sophisticated economic indices of house prices to define the{{U}} (17) {{/U}}of the policy. Electronic futures markets that are based on econometric indices of house prices by city, already begun by City Index and IG Index in Britain and now{{U}} (18) {{/U}}developed in the United States, will enable home-equity insurers to hedge the risks that they acquire by writing these policies. These examples are not impressive successes yet. But they{{U}} (19) {{/U}}as early precursors of a technology that should one day help us to deal with the massive risks of inequality that{{U}} (20) {{/U}}will beset us in coming years. |