Hedging the standard of living via cost of living index futures

Rainer Schulz

No 2000,93, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: 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.

Keywords: Cost of Living Index; Futures Markets (search for similar items in EconPapers)
JEL-codes: D11 D8 (search for similar items in EconPapers)
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb373:200093

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