Stock and diversifying without derivatives are just

This preview shows 25 out of 27 pages.

stock and diversifying without  derivatives are just as  important as hedging strategies 1010271-Cor-10
Image of page 25

Subscribe to view the full document.

0903270-Col-MBA-18-19 26 Conventional Hedging Strategies  Purchase Puts Infrequent use Upfront cost scares most away Sell “Covered” Calls Used reasonably often Investor not bearish, may not need downside protection  on whole position Shareholder extracts value while holding the shares in a  manner consistent with overall objectives Not a straddle Collar Strategy Used very frequently Provides maximum protection without triggering a  constructive sale Little to no upfront premium Stable asset to borrow from Liquidity Shortfall cumulative when hedging put and call 1010271-Cor-10
Image of page 26
0903270-Col-MBA-18-19 27 Hedging and Monetization Investor with Concentrated Stock Position Investor receives upfront cash proceeds Investor agrees to future delivery of shares or cash  equivalent amount at expiration and pledges the shares  as collateral Dealer Issue Investors who need liquidity for reinvestment or consumption combine  their hedging transaction with a loan Margin Loan Investor borrows against his hedged position when he/she needs  cash.  For high-net worth investors, loan rate is usually tied to LIBOR Prepaid Variable Share Forwards (PVSFs) A packaged product which effectively combines an equity collar with a  loan providing the following payoff: Two Types  of Loans Pros and Cons of Each Margin Loan PVSFs + Can borrow money when needed - Can only borrow 50% of the value of  the stock + Can borrow up to the present value  of the put strike + Some legal benefits - Forced to borrow immediately 1010271-Cor-10
Image of page 27
You've reached the end of this preview.
  • Fall '06
  • ZURACK,MARK

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern