3G and TCI are the hedge fund that intended to take over certain company like CSX. These kind of hedge fund employ certain strategies that are different from other
Hedge fund in the VW cases, they write options speculating the price of Volkswagen goes down, while earn the profit by option premium. they are simply the profit driven hedge fund
In 3G and TCI case, hedge funds are exposed to
1. The risk of volatility of the CSX return
because what 3G and TCI received from investment bank are totally determined by the return of the CSX's common share. So they are exposed to the CSX's equity risk 3. Regulatory risk
Because 3G and TCI have large undisclosed position represented by total return swap (12.6%), literally they defend themselves by just owning the economic benefit of the share. however investment bank actually act as the voting proxy for TCI and 3G and help TCI and 3G gain the seats in the board 4.
In the VW cases, hedge funds are exposed to
1. the unlimited lose on the downside of the option
2. potential short screeze situation
The total return swap the TCI and 3G enter into with the investment bank is the contract that mandates TCI and 3G pay a fix rate. In return, investment bank pay TCI and 3G a floating rate based on the performance of common stock of CSX. in order to hedge against the risk exposed to the fluctuation of the price of common share of CSX. investment bank also take the long position of the CSX's common share. So the risk of the fluctuation of the CSX's common share does not fall on the shoulder of the investment bank. Since the TCI and 3G enter into total return swap with Investment bank, These two hedge fund bear the risk of the CSX's common share. by saying that, investment bank basically has no risk related to the risk of the common share. they simply earn the spread. fund who buys the total return swap may expose to the equity risk of the underlying asset. also the funds who buy the total return swap may...
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