| Pine Street Capital | | |
FINA5290 Derivatives Analysiss
Individual Assignment
1. What is a hedge fund? How do hedge funds differ from mutual funds?
Hedge funds are investment vehicles that explicitly pursue absolute returns on their underlying investments. Hedge Fund incorporate to any absolute return fund investing within the financial markets (stocks, bonds, commodities, currencies, derivatives, etc) and/or applying non-traditional portfolio management techniques including, but not restricted to, shorting, leveraging, arbitrage, swaps, etc. Hedge funds can invest in any number of strategies. Hedge fund managers typically invest money of their own in the fund they manage, which serves to align their interests with
…show more content…
Risks that Pine Street Capital willing to bear is: (1) the individual security related risk and (2) the leverage risk.
Reasons: 1. Fund manager are expertise in the technology industry and thus the fund deals with technology driven companies which fund managers are comfortable in prediction of individual stock related risk and return and they are able to evaluate the technology field and pick up outperforming and positive alpha stocks in the technology field accurately. 2. As to maximize the return, the fund use leverage in their exiting strategies.
3. How would you hedge risks on July 26 using a short-selling strategy? What problems arise with the short-sale strategy? The return of PSC fund is calculated as PSC return = alpha + beta x Market return Using a short-selling strategy means that we would: 1) Short selling a certain amount index fund, for the case is the QQQ, an ETF which tracks on NASDAQ. 2) Eliminate the beta risk and the PSC return will always be the positive alpha.
Based on the formula, the short-selling hedge is that for example, if the market now change by 10%, the portfolio changes by 10% multiple by beta. For example (see below Table 1) if today PSC want to hedge out its 100 value of stock portfolio, eliminating market risk from the long portfolio leaves the portfolio with a guaranteed 3.35% return which is precisely the alpha of the long positions in the portfolio.
According to the
American Barrick is the largest gold producer in North America. The implementation of the gold-hedging program differentiated the firm from other major gold rivals and improved its reserve and financial strength. In 1995, American Barrick ’s latest gold find necessitated the company to determine a new hedge strategy for its gold production.
(See all the possible combinations on TABLE 2). 6. a) The portfolio’s risk would decrease if more stocks were.
think of a mutual fund as a company that brings together a group of people and invests
Mutual funds represent a portion of its holdings. It’s buying into certain products sold by the company. An example is investing in beef products. Anything that occurs with the meat products can affect the amount of money earned. Should a recall happen, people that
BancZero widely used derivatives in its trading and asset and liability management operations. When it came to its trading activities, BancZero operated as a dealer in derivative instruments to meet clients’ risk management needs by arranging transactions that permitted customers to hedge their exposure to prices of securities and commodities, financial indices, and interest rates. They also acquired positions based on
(5) If the similar strategy is used for the next 6 months from June 30th, the P&L of the hedging strategy between June 30th and September 22nd can be calculated as follows.
Hedge-funds are essentially investment pools for wealthy individuals that are managed by the best investors in the world. These investors use various strategies in order to increase returns and minimize losses. Hedging by its definition is an investment strategy that essentially uses put options to minimize losses on an investment. By taking an offsetting position on a security, the investor can protect him or herself from a total loss on that investment. Hedging is essentially an investor’s version of car or home insurance. While insurance will not cover your total loss, it prevents you from taking a total loss on your investment. Credit default swaps are a way of using this “hedging” strategy. Credit default swaps are essentially the insurance companies of Wall Street. If a pension fund wanted to loan money to a company that did not have a AAA or AA rating, they could loan money to the company through purchasing a credit default swap. If that company defaulted on the loan then the credit insurers would pay the pension fund the remaining amount on the loan’s interest. In return, the pension fund would have to pay a percentage of the interest they collected on their loan to the credit insurers. The system worked fantastically for both sides until hedge-funds found the ability to profit off of these credit default
We utilized a long-short trading strategy. Our strategy industry focus was on the technology space. The reason we focused on the tech industry is because the tech industry is known for both hype-stocks that do not hold real value and stocks that offer exponential growth. We placed short positions against stocks that we felt were overvalued ‘hype’ stocks as well as low-growth potential legacy stocks, and placed long positions with stocks that fundamentally were both reasonably priced and had more room for growth.
Hedge Fund Manager Manage funds for high net worth individuals, family trusts and pension funds.
Explain why investors may be attracted to high-risk investments such as exchange-traded derivatives, global funds, and other complex investment vehicles.
If today PSC want to hedge out its 100 value of stock portfolio, assuming beta=1.67, alpha is 3.35%: next year 's value today initial value QQQ+10% QQQ-10% long portfolio 100 100*(1+3.35%+1.67*10%)=120.05 100*(1+3.35%1.67*10)=86.65 short QQQ 167 167*(1-10%)=150.3 167*(1+10%)=183.7 total 267 270.35 270.35 return on hedged portfolio 3.35% 3.35% the theoretical long portfolio value increase (portfolio return)=percentage increase in QQQ(QQQ return)*1.67+3.35%
Option strategy is a hedge for uncovered long position in stocks. If deal will be canceled Smith receive two positions: short in Abbot and long in Alza. For complete hedge he needs two option call in Abbot and put in Alza. If he buys put option for Alza he will hedge from price drop in Alza shares. But he still has risk in from rising Abbot shares. So he decreases risk of the positions.
Mutual funds are an easy, convenient way to invest, without having to worry about choosing individual stocks. A mutual fund can be defined as a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors. The investment company manages the fund, and sells shares in the fund to individual investors. When one invests in a mutual fund, they become a part-owner of a large investment portfolio, along with all the other shareholders of the fund. The fund manager invests the contributions when shares are purchased, along with money from the other shareholders. Every day, the fund manager counts up the value of all the fund's holdings, figures out how many shares have been purchased by
2. If the NASDAQ index falls, an increase in the value of the puts may approximate the loss in the portfolio’s value. The protective put limits the portfolio’s downside