Established in January 1999, Pine Street Capital (PSC) was a market-neutral hedge fund that specialized in the technology field, facing market risk and trying to decide whether and which way to use in order to hedge equity market risk. They choose technology sector because the partners of PSC felt that they have enough ability to evaluate this sector and specially be good at picking out-performing stock. Short-selling of NASDAQ and options hedging strategy are the two major hedging choices for PSC. Either strategy has its own advantages in different economic periods and conditions. The fund has just through one of the most volatile periods in NASDAQ 's history, and it was trying to decide whether it should continue its risk management …show more content…
by x%, the portfolio changes by x*beta% market value of the market representation product used for short selling
(QQQ ) = market value of the portfolio for protection multiplied by portfolio beta
initial QQQ price * number of QQQ shares shorted = portfolio beta * sum of the initial market value of every stock in the portfolio (1-1)
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%
Pine Street Capital’s Portfolio on July 26th,2000
Ticker shares share price total Allocation Beta Alpha R-Squared
AMCC 24000 162.88 3909000 11.31% 2.15 6.42 0.58
AHAA 45000 36.19 1628438 4.71% 1.63 2.14 0.39
ANAD 70000 26.81 1876875 5.43% 1.65 1.22 0.45
CNXT 42500 35.75 1519375 4.40% 1.42 -0.08 0.39
CY 15000 43 645000 1.87% 1.07 1.44 0.39
HLIT 20000 28.06 561250 1.62% 1.63 -0.81 0.36
JDSU 22000 135.94 2990625 8.65% 1.56 1.08 0.57
LSI 12500 32.63 407813 1.18% 1.32 2.44 0.48
PWAV 40500 36.88 1493438 4.32% 1.39 6.23 0.3
QLGC 30000 77.94 2338125 6.77% 1.87 1.05 0.48
RFMD 21000 39.75 834750 2.42% 1.62 1.66 0.46
TQNT
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.
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
The current 50% hedging policy executed at the fund level has served well for OTPP for the past ten years, contributing to the fund’s positive returns. The FX Hedge Program not only has minimized the downside risk, but has also limited the upside potential. If OTPP decided not to implement a hedging program in 1996, they would have lost about $983 million CAD over the ten year period (1995-2005) which is valued at 2% of the portfolio. With the hedging program, OTPP was able to reduce the overall loss to about $469 million CAD, but also limited the gain from the depreciation of the pound.(Exhibit 1) Hedging is an excellent short-term risk minimizing strategy for long term investors, sustaining a continual payout of pensions during volatile times in OTPP’s invested currency markets. Currently, approximately 21% of OTPP’s net assets are exposed to foreign currency risk. Consequently, it is essential that OTPP maintain a risk management program of hedging, as slight currency fluctuations can significantly affect the value of the fund. Similarly to continual renewal of swaps, hedging can be a very expensive risk management strategy.
(a) The mean excess return, standard deviation, and portfolio weights for the minimum variance portfolio.
11. A company has a $90 million portfolio with a beta of 1.5. The S & P index is currently standing at 3000. Futures contracts on $250 times the index can be traded. What trade is necessary to change the beta of the portfolio to one?
As of November 17, 2017, we had a negative return of 7.46%, whereas the benchmark index generated a return of 3.48%, meaning that we underperformed the benchmark by 10.94%. The decrease in market value of common stock holdings accounted for approximately 3.46% of the total loss, and losses from futures contracts accounted for approximately 4%. The standard deviation of our portfolio was 3.41%. Our portfolio had a shape ratio of -2.35%, and the information ratio was computed to be -9.6%.
(See all the possible combinations on TABLE 2). 6. a) The portfolio’s risk would decrease if more stocks were.
Cost of Equity = Risk free rate + (Market return – risk free rate) X beta
The six stocks that I used to create my portfolio included Altera Corporation, Cabot Oil & Gas Corp., Dominion Resources, FMC Corporation, Chevron Corporation, and Nike Inc. Each of my stocks had weights, which I distributed for my $100,000. 20% of the $100,000 went towards Altera Corp., 15% to Cabot Oil $ Gas Corp., Dominion Resources, and Nike Inc. Finally I allocated 10% towards FMC Corp. and 25% towards Chevron Corporation. The stocks that I chose were intended to make my portfolio as diversified as possible so that I could receive high returns. I found that Dominion (D) Resources was the most steady and reliable
LTCM’s board of directors included many geniuses in from the financial world, who collectively created complex models allowed them to calculate risk of securities much more accurately than others. LTCM’s trading strategy was featured by the divergence in price between long-term U.S. Treasury bonds. It shorted the more expensive “on-the-run” bond and purchased the “off-the-run” security at the same time to exploit the price divergence. In order
This document is authorized for use only by Yen Ting Chen in FInancial Markets and Institutions taught by Nawal Ahmed Boston University from September 2014 to December 2014.
2. Compares the returns of the asset to the market over a period of time (Beta)
We use the equation ri=(Pt-Pt-1+Dt)/Pt-1 to calculate the monthly return of stock of Charles Schwab Corp, Quick & Reilly Group and Waterhouse Investor Srvcs. Then we have two methods to calculate the Beta of Equity for each company.
A common practice to determine the firm’s beta is to draw from historical data from published sources or compare numbers to competitors. In this case, Heinz can compare to Kraft, Campbell Soup and Del Monte and use professional judgement in determining the stock’s sensitivity to the market. A stock’s beta can be determined using a formula as well.
Where Kf= risk free rate, Km = market rate, B = beta, (Km-kf) = risk premium