Hedging An Equity Portfolio Essay example
Masters
Essay
Finance & Accounting
Pages 8 (2008 words)
Download 0
Hedging an Equity Portfolio Using Options Table of Contents Table of Contents 2 1.0 Introduction 3 2.0 Advantages and disadvantages of using options to hedge this scenario compared to using futures only 3 3.0 Explanation of how options could be used to hedge the risk faced by the fund manager 5 4…

Introduction

7 Reference: 9 1.0 Introduction A US equity fund manager holds €100m in a portfolio comprising the largest US stocks which perfectly replicates and benchmarks the S&P 500 index. The US Federal Reserve indicated that the programmed quantitative easing of purchasing $85 billion is not going to be carried out. The quantitative easing is used to stimulate the price when the corresponding interest rate decreases to 0%. The non execution of the quantitative easing is set to correct the equity market. The fund manager predicts that the reluctance of the US Federal Reserve to perform a quantitative easing is going have a profound effect on the performance of the portfolio. For this reason the fund manager as such wants to hedge the portfolio using option instead of futures. 2.0 Advantages and disadvantages of using options to hedge this scenario compared to using futures only Fund managers use both futures and options to order to hedge their portfolio. Though there are some marked differences in the two types of hedging tools. The choices of the hedging tools depend on the fund manager as well as the objective to hedge. In the present scenario, the fund manager has decided to use the options instead of futures (Reilly and Brown, 2000). This is because of the reason that the options provide certain leverage in comparison to futures. ...
Download paper
Not exactly what you need?

Related papers

International Portfolio Diversification
Investing on the stock market can be a very risky venture. According to Yavas (2007), both the Capital Asset Pricing Model (CAPM) and the Modern Portfolio Theory (MPT) indicates that investors should hold a well diversified portfolio in order to reduce risk. Beta is used to measure risk. A stocks beta indicates the sensitivity of the stock’s returns to the market returns (Madura 2006, p. 304).…
11 pages (2761 words)
The benefits of international portfolio investment
There are numerous benefits of internationalizing the portfolio. By internationalizing, the individual or firm will be able to minimize the risk; invest in growing markets thus benefiting from their growth; hedge the prices of goods in the consumption basket; enjoy higher return than expected; diversify investments; and enjoy lower variation of return. High economic growth leads to the higher GDP…
11 pages (2761 words)
Equity
Executive Summary: Owens & Minor Inc. Ticker: OMI Recommendation: Hold Price: $29.78 on 31.03.2010 Price target one year: $34.95 Highlights: A fortune 500 company headquartered in Richmond, Virginia. Wide distribution network throughout the United States. The provider of the broadest selection of branded products. Unique, superior products are offered through non competitive partnerships with…
4 pages (1004 words)
Portfolio Theory and Investment Analysis
wa + wb + wc = 1. E(rp) = waE(ra) + wbE(rb) + wcE(rc ) 0.6(-0.2) + 0.3(0.1) + 0.1(0.04) = -0.086 Hence the strategy before the 2007 economic crisis would have realised an expected return of -8.6% on investment. The strategy adopted from 2007 onwards in the light of the crisis would realise: E(rp) = waE(ra) + wbE(rb) + wcE(rc ) 0.4(-0.2) + 0.4(0.1) + 0.2 (0.04) = -0.032 The strategy adopted after…
8 pages (2008 words)
Hedging an Equity Portfolio
Cross hedging capabilities may depend on various factors. First is the degree in which the spot and futures currencies are negatively or positively correlated. Secondly, this also depends on the level of accuracy of the estimated risk-minimizing cross-hedge factors. In addition, time is an important factor in this process and therefore the capability of cross hedging depends on the stability of…
7 pages (1757 words)
Security Analysis and Portfolio Management
358). For the stock market perspective, the absolute investment returns are gaining more fame lately due to the start of mutual funds aiming at absolute return objectives. In contrast, traditional mutual fund aims at producing smart relative investment returns as compared to the suitable benchmark. Absolute returns facilitate profitability in most periods and acts over an extensive range of market…
10 pages (2510 words)
Hedging Oil Consumption
There are other inherent risks associated with business such as currency fluctuations, volatility of crude oil prices and so on. In order to reduce exposure to volatility in the market, many participants prefer hedging strategies using derivatives. A derivative is a financial instrument which derives its value from the underlying asset. One of the hedging strategies alternatives that are available…
6 pages (1506 words)