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Investment Options - Research Paper Example

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Investment Options

Individuals or firms who speculate in futures contracts by buying to profit from a price increase or selling to profit from a price decrease are aptly termed as speculators. Suffice it to say that speculators put their money at risk in the hope of profiting from an anticipated price change. Buying futures contracts with the hope of later being able to sell them at a higher price is known as "going long." Conversely, selling futures contracts with the hope of being able to buy back identical and offsetting futures contracts at a lower price is known as "going short."
An arbitrageur is a type of investor, actually a type of speculator, who attempts to profit from price inefficiencies in the market by making simultaneous tradesthat offset each other andcapture risk-free profits.An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, buy the undervalued shares on the one exchange while short selling the same number of overvalued shares on the other exchange, thus capturing risk-free profits as the prices on thetwoexchanges converge. Arbitrageurs are typically very experienced investors since arbitrage opportunities are difficult to find and require relativelyfast trading.
The three amigos were certainly not hedgers as they were not concerned about protecting the interest of Getty Oil. They were, in fact, keen on making a quick buck out of buying shares of Getty Oil (which were very cheap) and selling them at a higher price when the takeover battle commences. In this regard, they can be considered as speculators as they are buying the shares in the hope of higher selling prices in the future. However, because the three amigos were taking advantage of the price inefficiency of Getty Oil which was at 30$ instead of having risen to $50 to 60, they are arbitrageurs. They were so keen in capturing risk free profits or at least an investment with very little risk.

2. Describe step-by-step their strategy. What were the major assumptions of their strategy They were relying on what type of investors to move in what way

The strategy of the three amigos is to find a stock price which carried with it minimal or no risks (i.e. stock price would not go down in the future). They were looking for a company that was not closely observed by stock traders and which was very likely to have stock prices going up thereby making them earn profits in a very short period.

The major assumption that the three amigos made was that Getty Oil's stock price was not likely to go down and the conditions were ripe for an increase. They arrived at this by considering that Getty Oil was selling only at a low multiple of its cash flow and had assets that can be easily valued and liquidated. Getty Oil also had assets in the right place and had proven reserves. The political, economic and oil industry's environment also showed that is highly probable that oil players will be at the winning edge in the future. The only reason that Getty Oil stock price hasn't risen yet despite all the positive factors was that the shareholders were segmented which was causing inefficiency in grabbing the opportunity. With an imminent takeover, Getty Oil will soon take advantage of the positive fact ...Show more

Summary

To be able to answer this question, we must first determine what the words hedger, speculator and arbitrageur mean. Hedgers are individuals and firms which are able to establish a known price level for something they intend to buy or sell later in the cash market…
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