Sample Assignment on Hedging Strategies

Added on - 21 Feb 2021

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Table of ContentsINTRODUCTION...........................................................................................................................3Calculation of value at risk for using both Variance-Covariance and Historical Simulationmethod:........................................................................................................................................3Hedging StrategiesComparing Costs and Benefits of different Hedging Strategies6Recommendation:........................................................................................................................7CONCLUSION................................................................................................................................7
INTRODUCTIONAnalysing investment risk is vital for assessing the viability of investment. There arenumerous kind of formulas and scientific or technical methods which helps in evaluation of theinvestment proposals (Narayanaswamy, Jayram and Yoong, 2012). This study contains practicalsum of value of risk applying Variance-Covariance and Historical Simulation method, andevaluates hedging strategies. Report also provides comparison of hedging strategies anddemonstrate the relationship of the payoff and profit of different hedging strategies.TASK 1Calculation of value at risk for using both Variance-Covariance and Historical Simulationmethod:Variance-Covariance: The technique of variance-covariance is a quantitative technique forcalculating value at risk. Due to the current presumptions it makes, an individualneed distinctdata than all the other techniques to do it again (Variance-Covariance,2019). The technique ofvariance-covariance allows using of covariance such asvolatilities and correlationsof riskvariables and capital values inclinations with regard to such risk variables with the objective ofcalculating the risk valuation. This technique leads straight to the final outcome, i.e. the valuationat stake of the portfolio; there is no data about business situations. Throughout the wholemeasurement, the variance-covariance technique uses linear equations of the risk variablesthemselves, sometimes disregarding the drift. Some of the assumption it makes are:The technique of variance-covariance believes that somehow the earnings of a inventoryportfolio are evenly distributed across the average of a ordinary or bell-shaped allocationof probability.Although returns are circulated in an ordinary or bell curve configuration, company needto have the returns withinstandard deviation. For the most exchanged stocks, these couldbe searched or calculated.A simplifying aspect of this technique is that shares, generally triggered by certaininternal factor, may generally move forwards and backwards with each other. Thatimplies company need the covariance of yields against many shares for all the equities inan investment.
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