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. thinkstock|istock
    Options & Futures

    A Primer On The Forex Market

  2. Options & Futures

    Your Futures Are In Good Hands With ...

  3. Forex Education

    Getting Started In Foreign Exchange ...

  4. Options & Futures

    An Introduction To Swaps

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center