Hedging an Equity Portfolio Coursework Example | Topics and Well Written Essays - 2000 words

Hedging an Equity Portfolio - Coursework Example Zero cost collars can be defined as a strategy which is created by buying a put and selling a call in the same underlying security so that the strike price of the call gives rise to the exact amount of profit to negate the loss in the put option, so that the underlying scenario leads to neither loss nor gain. This action or strategy is mostly used by the bullish traders or investors who anticipate always a rise or a hike in value of the underlying securities and thus the investors want to protect their position by offsetting the excessive rise in prices by putting a collar or a ceiling and simultaneously creating a put to offset the hike in prices leading to profit. The zero cost strategy is mostly carried out using LEAPS options. The profit of the zero cost collars can be calculated by using the formulae- Purchase price of the shares – strike price of the call whereas the minimum loss can be a stock price at the beginning- strike price of put-/+ net credit or debit on trade.T he zero cost collar can be used to protect the investors investment effectively since utilizing this strategy we can mitigate the losses completely and even if the investor is a bullish trader then the zero collar strategy can be used to even reduce the amount of price hike or value hike in the case of the afore mentioned underlying securities. We have taken the date on 3/7/2014. Thus we have shown the strike price, sale price of the call and sell price of put of FTSE 100 index.