The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

KEY POINTS

• Equity portfolio management applications fall across the four roles of derivatives (returns management, risk management, cost management, and regulatory management) and the two basic categories of equity investing: passive and active.

• Equity derivatives can be used as investment vehicles by active or passive managers in the context of the four roles of derivatives.

• Portfolio applications exist for listed derivatives and OTC derivatives.

• Protective put buying is the most common risk management strategy using listed options.

• Cash secured puts and naked calls can be used to reduce market impact costs of implementing a strategy.

• Buy writes are the most popular way to use listed options to enhance returns.

• Stock index futures contracts are often ideal instruments for managing equity exposure in passive or active strategies due to their liquidity, flexibility, and low transaction costs.

• Stock index futures can be used to hedge systematic risk, create synthetic index funds or in an enhanced index fund program.

• A hedge ratio is needed to determine the appropriate number of stock index futures in a hedging strategy.

• Equity listed or OTC derivatives can be used to implement an asset allocation program.

• A broad spectrum of equity investment activities emanating from the role of derivatives can benefit from three basic categories of OTC equity derivative structures: options and exotics, equity-linked notes, and equity swaps.

• The instantaneous expected ...