Hedging Strategies For Minimizing The Underlying Risk Of Stock Portfolio

According to these it can be concluded that GM Corporation’s risk management policy is based on a mostly passive hedging strategy. In general, passive hedging is used by highly risk-averse companies that

Mr. Lee and the other executives expect to generate a higher profit from hedging since they have majority of their personal wealth invested into the firm. The focus of any hedging program should always be to minimize the firm’s risk of loss, but that does not mean the they will

Mr. Brown readily admitted that he was not at ease discussing the most recent approaches to risk reduction or hedging. He had received his MBA from Harvard in the 1960s and had spent most of his career working for a company that had little international exposure. Moreover, he was not familiar with derivatives such as currency options, which until recently were not widely traded. However, Mr. Brown had recently hired an assistant, Mr. Dan Pross, who had some knowledge of hedging and derivatives. As a student at UCLA, Mr. Pross had traded various types of derivatives for his own portfolio and was familiar with how they were traded. Although Mr. Pross did not have a finance background, he was, in Mr. Brown’s opinion, extremely intelligent and highly capable. Mr. Brown suggested that Mr. Pross make a presentation to the senior management on the use of derivatives to reduce risk.

The starting point of any foreign exchange risk management plan is to identify the exchange exposure faced. In controlling the foreign exchange risk, currency options have attained acceptance as very helpful tools due to their exclusive nature. They are very critical and convey a much wider range of hedging alternatives. Call options provide the right to the buyer to purchase the

Exposure risk managers can hedge exchange rate risk with either currency futures or currency options. It is generally suggested that hedgers should choose a hedge instrument that matches the risk profile of the underlying currency position as closely as possible. This advice, however, ignores the possibility that the hedging effectiveness may differ for the alternate risk management tools. This study compares the effectiveness of currency futures and currency options as hedging instruments for covered and uncovered currency positions. Based on Ederington 's (March 1979) portfolio theory of hedging, the results show that currency futures provide the more effective covered

A big issue in many emerging markets is short selling constraints that may be administered. This has implications on the strategy that can be used for these types of hedge funds – this will be discussed further in one of the below sections. Operational risk is also quite prevalent in emerging markets where geographical distances make monitoring of transactions more difficult.

The goal of this report is to determine the optimal portfolio step by step. Firstly, we will choose a list of potential companies by evaluating their performances through 4 years (from 1/1/2011 to 31/12/2014) as well as using useful tools such as return, standard deviation, variance, covariance and correlation to evaluate more clearly about each stock and the relationship of each pair of stocks. Then, we will select the optimal portfolio by construction of portfolios that maximize the return with the acceptable risk. Finally, combination the chosen portfolio with the risk-free asset is to reduce the risk as well as increase the return of the new portfolio.

Risk management theory can be divided in two competing approaches: equity value maximising strategies and strategies determined by managerial risk aversion. The first category suggests that hedging can increase the market value of equity and that companies should be concerned with total risk rather than systematic risk. There is, however, no comprehensive framework for explaining risk management within the imperfect financial environment in which firms operate. Therefore, it is not possible to draw undisputed conclusions on the value maximising risk management policy. Assuming imperfect capital markets, hedging theory suggests the following policies to maximise the market value of equity: Assuming no transaction costs, a constant volume of

The third and important use is a hedge. Hedge is a trading strategy in which derivative securities are used to reduce or completely offset counterparty’s risk exposure to an underlying asset [1] (Brown, 2012). Some research has shown that the options allow creating hedged portfolio that generate excess returns, which is not only covers risks, but also makes the portfolio is sufficiently speculative. Also a total risk is reduced compared to the portfolio which is not being hedged.

There is a need of more innovation in Derivative Market because in today scenario even educated people also fear for investing in Derivative Market because of high risk involved in Derivatives.Derivative Type:

This argument is flawed. In order to know performances of both strategies, both the shift direction and shift size should taken into consideration. First, it is not appropriate to conclude that one strategy can outperform another strategy in the category of active portfolios management strategies even though under the condition that there is a steeping of the yield curve. Performances of different strategies are various, different, even though under one same condition, since the detailed information of each strategy is unknown. Theoretically, performances of two strategies depends on the detailed shift situations (trend and size) of the yield curve. Second, the core method of the barbell strategy is focusing on the exceeding situations. To be more specific, the barbell strategy concerns securities with the longest and the shortest maturities. Meanwhile, the main approach of the ladder strategy is to build a portfolio including securities with approximately equivalent maturities. Third, however, under some situations, ladder strategy will outperform the barbell strategy. To be more precise, once the maturities of these two strategies are same, and if the yield curve will experience a negative steepening trend, the discount rate of the ladder strategy will be lower. Consequently, as the denominator of the ladder strategy is smaller than that of the barbell strategy, the ladder strategy will beat the other one. Fourth, on the other hand, if the maturities of these two

In the practice, companies face multiple business risk, which include price uncertainty and quantity uncertainty. In order to reduce the dispersion of operating cash flows, managers have to contend with two risk sources, the price risk and the quantity risk. As quantity and price risk increase, it is more likely that the firm would experience “over-hedging” costs from a strategy of matching a linear hedging position to an expected exposure level. Managers should reduce the linear hedging position and substituted to some non-linear contracts. The authors illustrate the fact by providing a numerical business

Generally there is an enormous amount of information available to the traders. So in order to trade profitably traders should take only essential information into consideration for analysis. In this paper we trade a portfolio of options, namely 10 BHPC98 puts and 10 BHPC88 calls both with the same strike date and price as evidenced in Appendix B. The trading strategy we will employ is called a “long straddle” and is usually amenable to day traders owing to the availability of stop loss orders on the Commsec platform. Information such as companies’ circumstances, media announcements, public reports and historical data are all important information available to establish a trading profile and goals. For example, this trade works best when an imminent announcement is pending that increases implied volatility or impacts on the share price significantly. One such occasion would be a half year reports due out in February 2016. Thus, in the process of building the trade we distill our trading profile.

The report on the above subject/topic is submitted in partial fulfillment of the requirement of MBA Program of AICISM AMITY, Noida. The report has been prepared based on information/data collected through primary survey and published information available from various sources. The data and the statistical ingredients, including the contents of the report, are either drafted/ authored by me or copied from specific authorized or acknowledged sources, the reference of which is mentioned at the bottom of the respective page/pages in the report. The conclusions and recommendations made in this report are, to the best of knowledge and judgment, based on the

Case Solutions: 1. Discuss the risk exposure of Amarnath hedge fund. Ans: The Amaranth hedge fund was exposed to following risks: a. Market risk: The risk that occurs from the volatility of investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading position c. Funding risk: It measures the extent to which they were able to meet margin calls on their natural gas position d. Capacity risk: The risk due to putting too much money into one