The US insurance industry has long faced the spectrum of large unexpected losses from natural catastrophes such as hurricanes and earthquakes. However, the September 11, 2001 terrorist attack clearly demonstrated a new form of catastrophic risk of man‐made origin. The damages in property and life are now well known as estimates of insured losses deriving from this event range from $40 to $54 billion. The 9/11 terrorist attacks renewed the capacity problem faced the insurance industry in the underwriting of large catastrophic risk. In that regard, this paper explores the feasibility of capital market alternatives to the conventional insurance mechanism, and analyses whether the capital market could provide extra capacity to absorb terrorism risk.

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<p style="margin: 0in 0in 0pt" class="MsoNormal"><font face="Times New Roman" size="3">We investigate the use of interest rate derivatives by U.S. based domestic and global bond mutual funds.<span>  </span>Using SEC filings and monthly return data, we document the use of derivatives across subcategories of bond funds and examine differences in returns between users and non-users of derivatives.<span>  </span>Compared with previous studies on equity mutual funds, our bond mutual fund sample shows a wider use of derivatives. However, as with previous studies on equity funds, our results show no overall difference in fund returns for non-users and users of derivatives. One exception is the Global Bonds fund subcategory. </font></p>

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