37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
Chapter 30: Stock Index Hedging Strategies 541
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or adjusted capitalization, in order to compensate for the higher volatility of the port
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folio.
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A similar process can be used for far larger portfolios. The estimate of volatili
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ty is, of course, crucial in these calculations, but as long as one is consistent in the
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source from which he is extracting his volatilities, he should have a reasonable hedge.
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There is no way to judge the future performance of a portfolio of stocks versus the
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ZYX Index. Thus, one has to expect a rather large tracking error. In this type of
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hedge, one hopes to keep the tracking error down to a few percent, which could be
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several points in the futures contracts over a long enough period of time. Of course,
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the tracking error can work in one's favor also. The main point to recognize here is
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that the vast majority of the risk of owning the portfolios has been eliminated by sell
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ing the futures contracts. The upside profit potential of the portfolios has been elim
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inated as well, but the premise was that the investor was bearish on the market.
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Note that if the futures are overpriced when one enacts his bearishly-oriented
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portfolio hedge, he will gain an additional advantage. This will act to offset some neg
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ative tracking error, should such tracking error occur. However, there is no guaran
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tee that overpriced futures will be available at the time that the investor or portfolio
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manager decides to tum bearish. It is better to sell the futures and establish the
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hedge at the time one turns bearish, rather than to wait and hope that they will
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acquire a large premium before one sells them.
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HEDGING PORTFOLIOS WITH INDEX OPTIONS
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As mentioned earlier, one could substitute options for futures wherever appropriate.
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If he were going to sell futures, he could sell calls and buy puts instead. In this sec
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tion, we are also going to take a more sophisticated look at using index options against
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stock portfolios.
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First, let us examine how the investor from the previous example might use
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index options to hedge his portfolio.
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Example: Suppose that an investor owns the same portfolio as in the previous exam
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ple: 3,000 COCO, 5,000 UTIL, and 2,000 OIL. He decides to hedge with index
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UVX, which has options worth $100 per point. Assume that the volatility of the UVX
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is 15%. This investor would then compute his total adjusted capitalization in the same
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manner as in the previous example, again arriving at a figure of $720,000.
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Suppose that the UVX Index is at 175.60. This investor would want to hedge his
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$720,000 of adjusted capitalization with 4,100 "shares" of UVX ($720,000 + 175.60).
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Since a 1-point move in UVX options is worth $100, this means that one would sell
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41 UVX calls and buy 41 UVX puts. He would probably use the 175 strike or possi- |