"Short" Strategies

What Does Short (or Short Position) Mean?

The selling of a security such as a stock, commodity or currency, with the expectation that the asset will fall  in value.

How does this apply to an IFEX ELF?

A Protection Seller fears that future prices may fall so sells an appropriate ELF contract by locking in the current price. This might be used to:

  • Hedge against a fall in the price of future renewals (see description below);

  • Re-balance a reinsurance portfolio:

  • Exploit mispricing compared to technical rate'

  • Complement existing CAT bond and ILW portfolios.
  • Exploit increased Second or Third Event prices following a major First Event Loss.
     

Hedging Renewals - Short

  •  IFEX lists ELF contracts for the current calendar year and the subsequent calendar year making it possible to hedge US Wind protection renewal prices.

  •  A Protection Seller can lock in the current price for US Tropical Wind coverages by selling forward the IFEX ELF 2011 contracts.

    Should a soft market develop and prices fall, the profits made by positive variation margin received would offset the lower premiums it would receive on its 2011 renewals.

    This short renewals hedge will allow Protection Sellers to manage their portfolio through the down phase of a price cycle.

    Of course, in exchange for receiving the 'premium' as the value of the contract falls if there is no triggering hurricane, the Protection Seller bears the risk that there is a triggering hurricane and he has to pay an amount reflecting the difference between his initial contract price and 100.