Derivatives and Hedging

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Derivatives and Hedging
Assignment: Hedging Strategy comprised of GM stock and 3.5% is comprised of Ford stock. Assume that GM and Ford are the only automobile industry holdings in the portfolio. Assume that you are bearish on the automobile industry over the next six months and neutral to bullish on all other industries. Utilizing derivatives create a hedging strategy to protect the portfolio over the next six months from your bearish automobile industry outlook.

Risk management is defined as the decision-making process involving considerations of political, social, economic and engineering factors with relevant risk assessments relating to a potential hazard so as to develop analyze and compare regulatory options and to select the optimal regulatory response for safety from that hazard. Essentially risk management is the combination of three steps: risk evaluation; emission and exposure control; risk monitoring. The strategy needed to be looked at and picked apart in several aspects by others in order to determine the flaws. Derivatives are instruments, such as options and futures contracts, which derive their value from the value of an underlying security, group of securities or an index. Considering the investment at hand, timing for derivatives is the essence for a successful strategy. Diversification is needed to balance out risks involved with any investment portfolio.

I would hedge the Japanese Yen to start. There are valid non-speculative reasons to hold puts on yen. Fluctuations in the price of the yen will lead to fluctuations in the price of the competition’s products and a weak yen would make Japanese yen less expensive, in turn increasing demand. The cash flows received on the hedging instrument (the derivative) will offset the cash flows received on the hedged item. The automotive industry is bearish and holding puts on the yen hedges this risk. Another consideration is a cash flow hedge is used to hedge exposures to...
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