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.

Risk financing and portfolio management - Essay Example

Comments (0) Cite this document
Summary
1. Introduction Investing in equities can be very risky. An investor needs to consider whether he/she is willing to take the risk inherent investing in such a risky asset class. While there is some bad news that equities represent a risky asset class, the good news is that the risk can be reduced or eliminated completely with the use of derivatives, such as various options, futures, forwards and swaps (Bodie et al., 2007; Miner, 2008)…
Download full paperFile format: .doc, available for editing
Polish This Essay93.8% of users find it useful
Risk financing and portfolio management
Read TextPreview

Extract of sample
"Risk financing and portfolio management"

Download file to see previous pages Section 2 provides a description of how an investor can hedge long and short positions in the stock using calls, puts, and option spreads. 2. Options Strategies as of the 1st of December 2011 This section describes how long and short positions in the stock can be hedged using puts, calls and spread options. The discussion begins with how a long position in the stock can be hedged and later focuses on how a short position can be hedged. a) Hedging a long Position A long position in a stock means that the investor has invested in the stock with the objective of profiting from prices increases. However, because the stock price behaves in a stochastic fashion, the investor cannot tell for sure whether the price will rise or fall. If the investor does not do anything and the price rises, then he will be better off. However, if the investor fails to hedge against price declines and the price ends up declining, then the investor runs the risk of losing all or some of his/her investment in the stock. Consequently, strategies have been developed which enables investors and portfolio managers to hedge against the risk that the price of a stock might fall. This can be done using calls, puts, and option spreads. ...
For a European call option which can only be exercised on the maturity date of the call, the call will only be exercised if it is in-the-money on the maturity date. A call option is said to be in the money if the stock price is above the exercise price. Having described what a call option is, the discussion will now be narrowed down to the question at hand. Now, the investor has a long position in the stock and is interested in hedging against a decline in its price. To do so, the investor can write call option on the stock. If the stock price rises above the exercise price, the option will be exercised and the investor will be required to sell the stock at the exercise price on the maturity date of the call. Since the stock is currently selling at 3375 pence, the exercise price of the option should be stated at 3375. By specifying the exercise price at 3375 pence, the investor has bought a guarantee to sell the stock at 3375. Therefore, even if the option is exercised, the investor will be able to benefit from the call premiums collected for writing the call option. In order to hedge against declines in the price of the stock using a put option, the investor should buy a put option on the stock. The exercise price should be the current price of 3375. A put option will give the investor the right but not the obligation to sell the stock at the exercise price at the end of the year. When the price of the stock is falling, the value of exercising the option will be high. In order for the put option to be exercisable, the price of the stock on the maturity date (that is one year from now) must be below the exercise price. Therefore as the price of the stock is falling, the value of the put option is rising. If the price of the stock happens to rise, then the ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Risk financing and portfolio management Essay Example | Topics and Well Written Essays - 2500 words”, n.d.)
Risk financing and portfolio management Essay Example | Topics and Well Written Essays - 2500 words. Retrieved from https://studentshare.org/management/1401990-risk-financing-and-portfolio-management
(Risk Financing and Portfolio Management Essay Example | Topics and Well Written Essays - 2500 Words)
Risk Financing and Portfolio Management Essay Example | Topics and Well Written Essays - 2500 Words. https://studentshare.org/management/1401990-risk-financing-and-portfolio-management.
“Risk Financing and Portfolio Management Essay Example | Topics and Well Written Essays - 2500 Words”, n.d. https://studentshare.org/management/1401990-risk-financing-and-portfolio-management.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document
CHECK THESE SAMPLES - THEY ALSO FIT YOUR TOPIC
Project financing and risk management
Executive Summary. This project is an explorative study of risk management and its mitigation strategy in NCB Jamaica Ltd Kingston. Risk management is an area, which plays a significant role in the banking industry. Any risk that is already identified and is to be mitigated can be considered a strategic risk?
14 Pages(3500 words)Essay
Portfolio risk management
As an investor, you need to know how to allocate assets that suit personal goals and strategies. Therefore, this report focuses on portfolio analysis, which is useful to the Investor in decision making. Table of Contents Introduction ……………………………………………………………4 Q 1.a ………………………………………………………………………4 Q 1.b……………………………………………………………………….7 Q 2…………………………………………………………………………11 Conclusion………………………………………………………………19 Portfolio Risk Management Introduction Por
10 Pages(2500 words)Essay
Risk Management
Infrastructural construction industry has underwent significant changes over the last few years with much focus being directed towards limitation of risks and challenges encountered during the process. Risk assessment utilizes various tool combinations which helps in identification of those risks considered detrimental to successful implementation of the project.
10 Pages(2500 words)Essay
The Portfolio of Current Issues in Risk Management
For example, the Japan earthquake affected global electronics and caused disruptions in the automobile industry. The Thai floods also caused shortages in the hard disk drive market and caused losses to electronics companies. The global supply ties in businesses with each other, and what seems to benefit industries also implies significant risks in their activities.
9 Pages(2250 words)Essay
The Financing and management of risk
The American coffee company has the largest coffeehouse chain all over the world. Starbucks sells coffee through its stores in around 62 countries. A total of around 21000 stores sell coffee all over the world of which 65% of the coffee selling stores are in US.
12 Pages(3000 words)Essay
Financing and management of risk
Royal Mail offers postal service in Great Britain and Northern Ireland and also engaged into worldwide parcel services. Royal Mail Holdings Plc. has the ownership of Royal Mail Group which offers postal services and delivery of letters under the brand name of Royal Mail and also distributes parcels across the world under the brand name of Parcelforce Worldwide.
6 Pages(1500 words)Essay
Titled Modern Portfolio Theory or Investment Management
(Armstrong, 2003) In this regard, security analysis and portfolio theory are important aspects of study as these are the summation of the assets held by an individual and his or her net worth in terms of liquidity and other such factors. As a promissory note that acts as an instrument which promotes borrowing or lending apart from being a source of contributing to the financing of corporate and non corporate organisations, a security is the basic element of a portfolio and its management.
18 Pages(4500 words)Essay
Risk and Risk Management
Originally, the purpose of country risk assessment was to identify risks that could affect a borrower's ability to repay according to the terms of the loan. The concept has since been extended; and banks have integrated country risk assessment into their daily operations and use it as a tool for tasks such as strategic planning, marketing, and evaluation of the performance of their international portfolios.
20 Pages(5000 words)Essay
Risk Management: Public Sector Loss Financing Schemes
This management plan takes into account both the internal and external environment that affect policy-making. By looking outward and across the organization as well as at individual activities, this comprehensive approach to managing risk is intended to establish the relationship between the organization and its operating environment.
9 Pages(2250 words)Essay
Finance- maybe Risk Management
Information is available directly, which implies that alteration, and subsequent market responses take place very quickly. The economic environment and markets can be influenced very quickly by alterations in exchange rates, rates of interest, and commodity prices.
9 Pages(2250 words)Essay
Let us find you another Essay on topic Risk financing and portfolio management for FREE!
Contact us:
+16312120006
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us