Mitsui Sumitomo builds unemployment rate derivatives

Japan's Mitsui Sumitomo Insurance plans to develop derivatives linked to unemployment rates in Japan as a means for companies to hedge their exposures to large fluctuations in domestic unemployment rates.

The hedge is aimed at consumer loan companies that would have to write off more bad debts as a consequence of an increase in Japanese unemployment rates, said Yuji Ito, deputy general manager and ART group manager at the financial solutions department of Mitsui Sumitomo Insurance.

Ito said he had yet to determine an underlying, but it would either be Japanese unemployment rates announced by the government or an index, based on those rates.

The idea is to allow counterparties to purchase call options where they receive payment - calculated using a specific formula based on the underlying index - if the index surpasses a certain pre-agreed level, or strike point, during the contract period.

The insurer's unemployment derivatives are scheduled for launch at the end of the year.