Finance Forum Responses

I need a 125 word reply to each of the following four forums from a finance class (500 total words in all)

Forum #1

Complete Concept Question 7 from Chapter 14: The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue.  Should Kenny buy or sell Treasury bond futures contracts to hedge the impending bond issue?

Kenny should sell the Treasury bond futures to hedge the potential issues with interest rates. Selling Treasury bond futures would allow for future contracts to be used as risks in hedging or cross-hedge, as “futures contract on a related but not identical commodity or financial instrument is used to hedge a particular spot position.” (Jordan, Miller & Dolvin, 2012) A bond’s price can decline in a market with consistently changing interest rates, and can offset a gains.

Jordan, B., Miller, T., & Dolvin, S. (2012). Fundamentals of investments, valuation and management (6th ed.). New York, NY:  McGraw-Hill. ISBN: 13: 9780073530710

Forum #2

The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue.  Should Kenny buy or sell Treasury bond futures contracts to hedge the impending bond issue?  Remember to complete all parts of the question and support your answers with examples from the text and other resources.

Kenny is right to be concerned about the possibility of rising interest rates. I think that Kenny should most certainly sell treasury bond futures contracts. “A futures contract is an agreement made today regarding the terms of a trade that will take place later (Jordan, Miller & Dolvin, 2011)”. Since Kenny is concerned about the potential for rising interest rates Treasury bonds are a fantastic tool for hedging. The value of a treasury bond is inversely affected by interest rates. Meaning, if interest rates rise the value of the treasury bill declines. So if Kenny issues the bonds and interest rates rise thereby reducing the value of the bond the shorted Treasury bonds futures contracts will gain value offsetting the loss.

All this considered I think that Kenny should really not worry himself too much about these things. If I was Kenny I would just enjoy my life as best I could because life, especially for Kenny, is short….

Reference

Jordan, B. D., Miller, T. W., & Dolvin, S. D. (2011). Fundamentals of Investments. McGraw-Hill Irwin.

Forum #3

Complete Concept Question 12 from Chapter 15: Recall the options strategies of a protective put and covered call discussed in the text. Suppose you have sold short some shares of stock. Discuss analogous option strategies and how you would implement them. (Hint: They’re called protective calls and covered puts.)

Analogous option strategies such as covered puts and protective calls can be used as strategies towards shares of stock. A covered put shows a comparable strategy to a covered call as it puts options on a stock, such as in instances of declining stock price, where price can be capped in exchange for premium options at a certain price. Protective calls allow for a similar strategy to the idea of protective puts, as they are in line with each other, as they allow maximum protection for guiding stock exchanges and purchasing. Protective calls allow for purchasing of call options as a type of insurance in investing, this helps insure gains on short sales.

Forum #4

One analogous options strategy that I might use to manage risk is the covered put. The text discussed the covered call strategy which is not all that different from a covered put. The covered call strategy involves selling a call option on a stock that is already owned (Jordan, Miller & Dolvin, 2011). The goal of the covered call is that the call option will not meet its exercise price enabling the investor to keep the premium and still maintain the shares they own. So you are betting on the stock not to perform similar to shorting, you are simply making a less risky wager. The covered put works basically the same although in an inverse fashion. As opposed to buying a long stock position and selling a call option the investor would have a short position and sell a put option. The covered put is designed to help an investor generate income in a neutral or slightly bearish market whereas the covered call is more effective in a flat or mildly uptrending market (Frederick, 2014).

Another analogous options strategy that can be used to manage risk is a protective call. “A Protective Call is a strategy wherein, the investor enters a short position in the underlying stock and simultaneously purchases call options of the same underlying to limit the risk of the short sale to a fixed amount (Fyers, 2016)”. This strategy is also designed for a bearish market and the goal of the investor again is to not have the options meet reach the strike price thereby earning the premium and still maintaining the stock position.

Reference

Frederick, R. (2014, January 30). Using Covered Calls and Covered Puts to Manage Risk. Retrieved from Charles Schwab.

Fyers. (2016, July 3). Bearish: Protective Call. Retrieved from Fyers: https://www.fyers.in/tool-box/bearish-protective-call/

Jordan, B. D., Miller, T. W., & Dolvin, S. D. (2011). Fundamentals of Investments. McGraw-Hill Irwin.