On 13 December 2001, there was a terrorist attack on the Indian Parliament. In the following days, there was a dramatic escalation of tension, complete with nuclear sabre-rattling.
I was in North Block at the time. I could not help think that my GPS coordinates were on the shortlist of any plan for nuclear attack against India. Vaporisation is not that bad, once you get to think about it, but one does think about it.
I tried to look at the fledgling Nifty options market, to see whether there was something one could read in the implied volatility. Then I started thinking that nuclear war is a unique problem on the options market. There are really two kinds of players in this situation. The first is a person in Bombay/Delhi who expects to be vaporised in the event of nuclear war. For him, it's efficient to sell protection, getting cash for free while he's around with no cash outgo if things go wrong (thanks to vaporisation). This should generate a lot of supply of protection and generate apparently low implied vols. Then there are investors at a safe distance -- e.g. foreign investors -- who might like to buy options as protection. But they'd have to worry about whether NSCC would remain aloft across the nuclear war; though they would expect that the Indian government would ensure that NSCC would not default at a time like this. So if nuclear war was a serious threat, options would be cheap but foreign buyers would be skittish about credit risk.
It was interesting, thinking of the tree of states of nature and option payoffs, some of them labelled `vaporisation', asking how to back out the probability of nuclear war from this information. Some of these thoughts came back to me today, when I saw this talk by Irwin Redlener. His big idea is that during the cold war, civil defence countermeasures against nuclear war were irrelevant, since nuclear war between superpowers would torch the sky and there would be no life on earth after that. But the genuine nuclear threats that we face today, such as a few Indian cities being targets, are qualitatively different. Civil defence countermeasures can help greatly reduce the toll, and there is something to live for because these small scale nuclear explosions do not imply the end of life on earth. He argues that modest efforts to prepare for this scenario could save a half million lives in the scenario of a modest 10 MT nuclear weapon targeted at a major city centre.