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.
BREAKING DOWN '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.