1011100-Cor-11_v2 - EquityDerivatives andRelatedProducts...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Equity Derivatives  and Related Products Class 11: Equity Derivatives for Corporations and Insurance Companies Mark Zurack November 16, 2010
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
0903270-Col-MBA-18-19 2 Class Objectives To explore how to hedge a stock with a proxy To discuss the unique accounting issues corporations face when  hedging a stock To describe strategies corporations employ on their own stock To discuss how corporations using options to issue Synthetic  Convertibles To describe the uses of Equity Derivatives by Insurance Companies 1003190-MBA-
Background image of page 2
0903270-Col-MBA-18-19 3 Instances Where It Is Not Possible to  Directly Hedge Single Stock Risk Underwriters Lock-up Lack of stock borrow to implement dealer’s short sale activity Lack of trading liquidity to support hedging strategy Affiliate issues Contractual obligations 1003190-MBA-
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
0903270-Col-MBA-18-19 4 Market, Industry and Proxy Basket  Hedges Broad Market Index  – A proxy hedge using a broad  Sector  – A proxy hedge with concentrated exposure  to an economic sector (e.g., financial services)  using an index or a basket of stocks Industry  – A proxy hedge with concentrated  exposure to a specific industry within a sector  (e.g., investment banking/brokerage) using an  index, single stock or basket of stocks from that  industry (e.g., MWD, MER) Company-Specific  – A direct hedge with  concentrated exposure to the specific company in  which the investor has a position Broad Market Index Sector Industry Company- Specific Least Effective Hedge Most Effective Hedge 1003190-MBA-
Background image of page 4
0903270-Col-MBA-18-19 5 Employee Stock Options Background   Some individuals have a good portion of their net worth in  Employee Stock Options.  There are two types of  Employee Stock Options: Non-qualified stock options Incentive stock options Legal Tax Credit / Margin Ability of corporate  insiders and affiliates to  enter into hedging  transactions SEC reporting  requirements SEC short swing profit  rules Non-qualified stock options  (ESOs) generate ordinary  income Exchange traded and over- the-counter (OTC) options  generate capital gains;  gains can potentially be  long-term Potential mismatch in  character Potential applicability of IRS  Section 1092 straddle rule Potential need for collateral,  other than the ESO, to  support certain hedging  transactions that involve  future obligations on behalf  of the client Special Considerations 1003190-MBA-
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
0903270-Col-MBA-18-19 6 Accounting Considerations for Corporations  Hedging and Monetizing Crossholdings When the fourth method is used - corporations desire cash flow hedge  accounting on derivatives transactions
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 16

1011100-Cor-11_v2 - EquityDerivatives andRelatedProducts...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online