Reliable numerical simulations of problems for pricing real estate derivatives

Abstract

The globalisation of nancial systems has presented new challenges to investing in real estate assets. For example, any crisis occurring in one real estate market will have an adverse e ect on other markets regardless of them being vastly geographically distant from each other. This interconnectedness is due to the ease of acquiring property portfolios using capital from investors coming from di erent jurisdictions who would have pooled their capital to acquire those properties. This illustrates how capital can ow internationally in the process creating linkages between various markets. The globalisation of real estate markets and the amount of capital invested in them results in a need for innovative mechanisms to manage and contain the risk of having shocks in the real estate market destabilising and a ecting international nancial markets. Risk management for real estate portfolios can be e ectively done through the use of real estate index based derivatives.