Terrorism and the financial markets
Dr Gordon Woo, Risk Management Solutions Ltd., London

Large fluctuations in the financial markets may arise purely endogenously,but they also can be triggered exogenously by changes in the critical state of the trading environment. One such triggering mechanism is provided by macro-terrorism, such as threatened by Islamic militants. A new financial instrument for the transfer of terrorism risk is a terrorism catastrophe bond. In the context of a review of terrorism risk modelling and the pricing of catastrophe bonds, the use of such instruments as investments is discussed for hedge funds adopting bear strategies.