Hedging An Equity Portfolio - Essay Example

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Hedging An Equity Portfolio

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. ...Show more

Summary

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…
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