Mutualization Of Risk

AAA

DEFINITION of 'Mutualization Of Risk'

Dividing up the costs associated with risks and financial losses among several investors, businesses, organizations or people. Mutualizing risk lowers the overall potential for significant financial loss to any one entity.

INVESTOPEDIA EXPLAINS 'Mutualization Of Risk'

Historically, one of the key roles that financial clearing houses at futures exchanges play is to promote stability and minimize (or more effectively manage and respond to) financial crises by mutualizing risk among members.

Mortgage-backed securities and credit default swaps are used to mutualize risk among investors. By dividing up risk, these derivatives effectively reduce each member's hedging cost, as each party diversifies its risk exposure.

RELATED TERMS
  1. Clearing House

    An agency or separate corporation of a futures exchange responsible ...
  2. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  3. Futures

    A financial contract obligating the buyer to purchase an asset ...
  4. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  5. Risk

    The chance that an investment's actual return will be different ...
  6. Central Counterparty Clearing House ...

    An organization that exists in various European countries that ...
Related Articles
  1. A Primer On The Forex Market
    Options & Futures

    A Primer On The Forex Market

  2. Your Futures Are In Good Hands With ...
    Options & Futures

    Your Futures Are In Good Hands With ...

  3. Getting Started In Foreign Exchange ...
    Forex Education

    Getting Started In Foreign Exchange ...

  4. An Introduction To Swaps
    Options & Futures

    An Introduction To Swaps

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center