2000-11-01Buch DOI: 10.18452/3414
Hedging the Standard of Living via Cost of Living Index Futures
People dislike inflation because inflation erodes the real value of future nominal income and wealth. Adjustment of future nominal values via a cost of living index is an appropriate way to handle the problem of real income risk. Nonetheless an important aspect needs more discussion: If markets existed in which ’real income risks’ could be traded—would a rational individual always voluntarily purchase protection against such risk? A model is developed to shed some light on this aspect. It shows that the optimal behaviour depends - as expected — on the cost of protection and the risk preferences of the individual.
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