Nobody downloaded yet

Hedging Equity - Case Study Example

Comments (0) Cite this document
Summary
In this case, the investor can use them even to protect his downside. Options also enable one to employ considerable leverage. The trader…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER97% of users find it useful
Hedging Equity
Read TextPreview

Extract of sample
"Hedging Equity"

Download file to see previous pages Another advantage of using options is its ability to allow the trader to sell them against shares that he or she already owns. Through this option, the trader can earn extra income from the sale of these shares.
On the other hand, option strategies have some drawbacks. Options can be of high risk even though they are designed to reduce risks. Options fall the risk-reward ration in that, options with higher returns are also characterized with greater risks and vice versa. Also, even though options have got the leverage advantage, it also has disadvantages arising from the leverage as the loss resulting from them can be horrible since all losses are multiplied. This is especially where too much leverage is used. The use options are also sophisticated in that it takes long for someone to know how it works (LearnMoney.co.uk 2015). Options are also risky where there is less information about the quotes as well as other analytical information such as the implied volatility. Dunbar (2012) notes that, options are also not available to cover all stocks as it limits the number of possibilities available to the trader. Another limitation of using the options strategies is the highest commission per dollar invested, which is incurred during their trade. This is especially common for spreads where an investor pays commissions for both spread sides. According to the ThinkTrade.net (2006), the options have higher spreads due to the lack of liquidity. This makes the trader incur more costs in the form of indirect costs when trading them as he will be giving up the spread. There is always a waste of assets since options lose value over time. Therefore, the traders should be right on the direction as well as his timing.
According to Arunajith (2007), the zero cost collars are also called the castles collar and is an option trading strategy, whose use is in the short term so as to seek ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Hedging Equity Case Study Example | Topics and Well Written Essays - 1750 words”, n.d.)
Hedging Equity Case Study Example | Topics and Well Written Essays - 1750 words. Retrieved from https://studentshare.org/finance-accounting/1698560-hedging-equity
(Hedging Equity Case Study Example | Topics and Well Written Essays - 1750 Words)
Hedging Equity Case Study Example | Topics and Well Written Essays - 1750 Words. https://studentshare.org/finance-accounting/1698560-hedging-equity.
“Hedging Equity Case Study Example | Topics and Well Written Essays - 1750 Words”, n.d. https://studentshare.org/finance-accounting/1698560-hedging-equity.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document
CHECK THESE SAMPLES - THEY ALSO FIT YOUR TOPIC
Hedging
...? Hedging Strategies: Forwards, Futures & Options Munaf Usmani Academia Research When analyzing the case at hand, the first aspects that must be confirmed are the cash flows of the company. First of all, its Slovak counterpart repatriates profits to them in Euros, but they will receive Pound Sterling at the time of receipt as GBP is the standard currency in the UK. Secondly, Virtual Books are going to engage in import of certain products from Slovakia which will trigger a cash outflow in Euros. However in this case, the company must use its GBP account to effect the payment. Hence in both cases, Virtual Books has an exposure to potential exchange rate risk. There are various ways in hedge oneself from exchange rate risk by the use... of...
3 Pages(750 words)Essay
Hedging Strategies
...? Hedging Strategies: Forwards, Futures & Options Munaf Usmani Academia Research Virtual Books has two streams of cash flows which are exposed to potential exchange rate risk. The first cash flow comprises of the profits which are being repatriated from Slovakia. Now the case specifies that the money is received in Pound Sterling, however Slovakia has adopted the Euro as its currency and we shall assume that it remits Euros which are converted into pounds and then given to Virtual Books. The second stream of cash flows is the import payments which Virtual Books must make to its sister concern in Slovakia. These payments must be made in Euros and hence, Virtual Books is exposed to potential exchange rate risk on these...
2 Pages(500 words)Essay
Hedging an Equity Portfolio
...? Hedging an Equity Portfolio Insert Insert Grade Insert Insert A1. Derivatives traded on exchange markets that may include currency futures and options and swaps are usually limited. Moreover, the foreign market activities have a vulnerability of being highly hindered by the presence of exchange controls and other regulations. As a result, of this hindrance, market players are constantly adopting to adjustments that will enable a dynamic approach in risk management of foreign exchange (Hull 2012). Consequently, elements of risk management like cross-hedging have come up. This tool is used in the reduction of risks in the event that expected cash flows are dominated in a low value...
7 Pages(1750 words)Essay
Hedging An Equity Portfolio
...? Hedging an Equity Portfolio Using Options Table of Contents Table of Contents 2 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. Explanation and discussion of how a zero cost collar could be used in this scenario 5 4.1 Explanation and discussion of the zero cost collar 5 4.2 Application of the zero collar cost shown with an example 6 5. Considerations of additional risks and considerations to be taken into account when using options to hedge a portfolio. 7 Reference: 9 1.0 Introduction A...
8 Pages(2000 words)Essay
Equity
...Equity Internal alignment is done to tune up the organization with the present goals and objectives. The internal alignment is done to support the smooth flow of the activities in the organization with various departments by providing equal opportunity and paying for the worthiness of the work done by the employees. A well organized internal alignment provide right ambience for the employee to motivate himself to perceive the goals of the organization The factors which regulate the internal alignment are: External factors: Economic status of that region, Government policies and regulations & policies, Stakeholders who render their thoughts, Culture & customs prevailing... Internal...
2 Pages(500 words)Essay
Quantile Hedging
...sold short. On the other hand, when the industry declines, the trader will earn from the short sold securities and lose from the long ones. Thus, hedging also brings risk when the securities appreciate in value. But the possible loss is not as much as when hedging is not done. The classic practice evolved into more sophisticated means as new mathematical tools or models are introduced. All types of hedging techniques generally involve distribution between the actual market value and theoretical value, and aim to gain profits when these values converge (Wikipedia, 2006). Common types of hedging are applied in insurance, credit risks, foreign exchange and...
33 Pages(8250 words)Dissertation
Currency Hedging
...rates and so on. It must be noted that hedging practices provides the opportunity to practice different strategies and techniques in order to maximizing the returns while with minimizing the exposure related risk. Indeed there are a few situations in which currency hedging is useful such as in international equity or/and bond investments, investing in currency and trading in currencies as retailers do and inflation limiting hedging (Chen, & Kang, 2009). The latter alternative typically involves using commodities and/or metals to hedge against inflation, which is typically aided by the US Dollar. In other words, inflation wary investors might...
22 Pages(5500 words)Essay
Various options hedging strategies
...number company treasurer May 16 Various options hedging strategies The bull spread-A bull call spread is a hedging option strategy involving the purchase of call options at a given strike price and the sale of a similar number of calls of the individual asset with a matching expiry date at a higher strike price. The difference between the strike prices minus the net cost options of the long and short options gives the maximum profit (Hull 12) Ratio spread-This is an option strategy that has the aim of reducing risks associated with the movement of the price of the underlying asset with short and long positions offsetting. This strategy relies on the change of the price of the option that has been caused...
1 Pages(250 words)Research Paper
Hedging an Equity Portfolio
...Finance and Accounting Hedging an Equity Portfolio Contents Contents 2 Part A. 3 Portfolio Setup 3 Part B. 3 Hedging:- 3 Explain the advantages and disadvantages of using options to hedge this scenario compared to using futures only 3 Explain and discuss how a zero cost collar could be used in this scenario. Give an example using current options prices 4 Confirm your result using the OSA (Option Scenario Analysis) function on Bloomberg 5 Show and explain the effect of your hedge on the profit and loss of your portfolio in different market scenarios. Show screen casts of your result 6 Making reference to academic literature and recent events on...
8 Pages(2000 words)Coursework
Hedging Strategy
...Hedging strategy of the of the Is a hedging strategy the best plan of action? Clark should consider the Treasury bond futures hedging strategy because it is the most efficient fundamental tool of risk management for all the investors around the globe. If Clark plan to buy fixed income/returns securities in the upcoming period and is concerned regarding the probability of high prices, then he can purchase treasury futures as well as secure an utmost purchase price. By selling the Treasury bond futures, Clark can lock in a higher selling price as well as protect the worth of individual security or portfolio against likely decreasing prices. By considering the Treasury bond futures hedging strategy, he can minimise his risk... have a...
2 Pages(500 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Let us find you another Case Study on topic Hedging Equity for FREE!
Contact Us