Security by design: Defence, aerospace and derivative hedges

Defence production and exports serve not only as economic assets but as political risk management instruments. Countries that can export defence technologies increase their diplomatic influence. When countries are combat-tested, their defence products gain global traction, insulating them through export diplomacy. For instance, during the 2024–25 Israel–Iran conflict, Israel’s effective use of Iron Dome and David’s Sling systems led to a surge in export interest from Germany, the Czech Republic, and Gulf states.

Similarly, India’s Operation Sindoor in May 2025 showcased the operational maturity of the indigenously developed BrahMos cruise missiles and Tejas fighters, spurring export interest across Southeast Asia and Africa.

Such sales build political alignment, and importing nations become stakeholders in the exporter’s political stability. Defence deals increasingly include co-production and long-term training contracts, which anchor bilateral relations beyond transactional terms. This pattern has been evident in the India–Philippines BrahMos deals and the Israel–Germany Arrow 3 contracts, which emerged following regional instability.

Aerospace as Political Risk Shield

The aerospace sector has helped nations to immunise themselves against political risk. For example, aerospace influences political risk through dual-use exports, space-based systems, and regional aviation dominance.

Israel’s precision airstrikes using F-35I Adirs and loitering UAVs during the 2025 Iran conflict reinforced its stature as a high-tech aerospace exporter. This led to accelerated defence procurement talks with Romania, Finland, and India to acquire or license UAV and missile tech.

Aerospace exports help establish long-term maintenance contracts, training programmes, and supply chains that lock in bilateral dependencies. A robust domestic civil aviation ecosystem enhances connectivity and economic integration, thereby reducing political fragmentation.

India’s push to develop aircraft leasing in GIFT City is aimed at reducing reliance on foreign OEMs like Boeing and Airbus after recent political blockades. Civil aviation also provides dual-use capability: during crises, commercial fleets can be mobilised to move troops and evacuate civilians. This adaptability reduces the country’s exposure to external logistical choke points.

Countries are constrained to adopt a model of conflict characterised by short-duration, high-intensity engagements followed by rapid de-escalation, which represents a new equilibrium of nuclear-backed, limited war in South Asia. These events highlight a trend where arms exports are not just commercial exchanges, but tools of political insurance that immunise buyers and sellers against future political risks.

Defence Exports as Political Hedges

Defence importers increasingly prefer platforms that have proven effective in live combat, as demonstrated by Israel’s Iron Dome and India’s precision airstrikes. Such systems are seen as low-risk acquisitions, reducing uncertainty in operational performance and political alignment. For example, after the April 2025 missile exchange between Israel and Iran, Germany and Finland began procurement talks for Israeli missile shields.

India’s rapid retaliation during Operation Sindoor drew interest from Southeast Asian and African nations seeking medium-range cruise missiles, UAVs, and electronic warfare systems. This represents a diversification from traditional suppliers, such as the US and Russia, toward other defence exporters with recent battlefield validation.

Exporting defence systems creates lock-in effects, where long-term contracts for maintenance and spare parts become vectors of dependency. Eventually, even a country with divergent ideologies may form a collaboration with the government that supplies defence systems, reducing the likelihood of diplomatic opposition and thereby reducing political risk between these two countries.

Defence sales are increasingly bundled with intelligence-sharing and surveillance technologies, which further embed exporters more deeply into the buyer’s security. This shift is evident in India–Israel, Israel–Balkans, and Russia–India defence alignments, where defence deals have led to cooperative political stances that may result in reduced political risk in the region.

Derivatives for Political Risk

In the current political climate, effective immunisation against political risk requires a cross-sectoral approach that brings together financial, defence, and aerospace capabilities. These domains are no longer isolated policy silos. Instead, they seem to form insurance mechanisms that collectively maintain political autonomy and resilience.

The increasing complexity of global threats, sanctions, commodity shocks, missile warfare, and trade disruptions requires strategies that work at both the political and business levels. Financial instruments, such as commodity futures, credit default swaps, and interest rate swaps, enable firms to hedge against political risk.

In the context of political risk, financial derivatives such as oil futures and options on metals serve as a hedging instrument. These instruments enable firms to factor in political risk before disruptions occur. They are speculative in nature but are supported by quantitative justification.

The pricing of these derivatives adjusts to perceived political risk. For example, during the Israel–Iran escalation and the Russia–Ukraine war, oil and gas futures markets had volatility spikes due to localised political risk. Recent studies have shown that political shocks create “jump risks” in commodity prices, making derivative contracts essential for hedging positions.

Hedging strategies range from natural hedging to financial instruments like futures, forwards, and options. Immunisation strategies, particularly in fixed-income portfolios, ensure that changes in interest rates caused by political risk do not affect the value of liabilities and assets. These instruments stabilise capital flows and protect balance sheets in times of uncertainty, as seen in studies that link derivatives markets to political risk.

Simultaneously, combat-proven defence systems, specifically those used in recent conflicts such as the Israel–Iran missile exchange and India’s Operation Sindoor, serve a dual purpose: they deter hostile actors and create long-term export relationships that lock in diplomatic alignment. Aerospace capabilities complete the triad. Satellite surveillance, dual-use aircraft fleets, and maintenance ecosystems support national integration and crisis response.

Countries like India are developing indigenous aerospace ecosystems for passenger aviation and ISR, reducing reliance on foreign OEMs and safeguarding sovereignty over critical airspace infrastructure. Taken together, the approach has three layers: financial hedging, defence deterrence, and aerospace resilience.

Studies indicate that these three layers form the foundation of a political risk immunisation architecture. This perspective treats political risk not as an exogenous threat but as a manageable, forecastable, and even negotiable element of global strategy.

The author is a Professor of Business Analytics at IIM Ranchi and Visiting Fellow at Hong Kong Poly University, and Ural Federal University, Russia.

(The views expressed are those of the author and do not necessarily reflect official policy, position, or endorsement of the organisations or institutions he works with.)