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AUGUST 26, 2010
Firm Makes Bold Bet on Falling Prices
A Wager by Fairfax Financial Risks $174 Million. If Deflation Arrives, It Could Be Worth Billions.
By GREGORY ZUCKERMAN
A Canadian insurer is turning to a seldom-used strategy to make a big wager on falling prices over the next
As more investors worry about the possibility of deflation—or a
sustained period of falling prices that could cripple stocks—
Fairfax Financial Holdings Ltd. has spent nearly $200 million to
buy derivative contracts wagering on a decline in the consumerprice index, an inflation indicator. The trade could lead to huge
profits if deflation occurs.
Greg Zuckerman discusses a Canadian insurer that has
wagered on derivatives that profit from a decline in
Fairfax purchased some of the derivative investments in the first
three months of the year, when few fretted about deflation and
the cost of the contracts was cheap. It added more in the second
The derivatives now are catching the attention of some on Wall
Street. They have gained more than 50% in value since Fairfax
made its original purchases from a number of banks, generating paper profits of more than $100 million.
The Fairfax bet, which aims to protect $22 billion of Fairfax's
investment portfolio, comes as investors grapple with a
particularly challenging environment, with the economy fragile
and stock indexes struggling. Few investors are willing to make
big wagers on deflation, despite its potential, with many
skeptical any deflationary period would...