EASTER ASSIGNMENT 2016 Harvard Case Solution & Analysis

EASTER ASSIGNMENT 2016 Case Solution 

Portfolio Management

It is expected that investors always prefer to invest in those companies which could maximize their return by minimizing the risk. In this case, the investors who hold the shares of Easyjet will prefer to invest in RAV as it is providing a maximum return by minimizing the return.

Comment on the weights of the active portfolio and the market portfolio in the final TB portfolio

The TB's portfolio weight is different in the case of active portfolio and market portfolio. As portfolio risk is dependent upon alpha and higher, the value of the alpha will result in the decrease in the risk factor.

Q2 (b)

Convertible Bond

It is expected that a convertible provides an opportunity to bond holder that he could convert the bond into shares or cash at the time of maturity and bond holders mostly pursue the maximum option which ever maximize their wealth.

Mandatory Convertible Bond

It is expected that a mandatory convertible is a bond, which provides an opportunity to bond holders of conversion or redeeming the bond into share but on certain contractual terms such as conversion before the maturity date or conversion of bond into common stock is mandatory at the time of conversion.

Physically settled' mean

It is expected that in the physically settled options, the investors have the opportunity to settle the bond physically into shares or underlying asset, and this option opposes the cash option. In this option, the holder is entitled to underlying asset at the time of maturity.

Conversion rate represent

It is expected that the difference in initial conversion price and the today's conversion price represent that it will provide a greater return as compared to the initial conversion price and would help to maximize the wealth of shareholder.

Reasons behind the options considered being OTC

As this stock could be traded through dealer other than the centralized exchange, therefore, these stocks are considered as over the counter.

Cash-Settled (Options Contract) Mean

It is expected that cash-settled options contract is that type of contract which involves no physical evidence at the time of purchase, and it is settled against the difference between the current price of the option and the strike price which is the price of the contract at the time of purchase. It is expected that this is the option which is mostly used when the transportation cost is high.

Hedge of Vodafone

It is expected that the management of the company is using hedging procedures against the falling share prices and by using hedging procedures, the management of the company is trying to minimize its risk related to the share price of the company.

How does buying the calls provide a hedge?

The firms use put options in order to hedge themselves against the risk that they are facing due to having uncertainty. A call option provides the right to buy the option, and it entitles to option holder with a facility to hedge its risk against the rising prices. The holder of call option exercises correctly by buying the option in order to protect themselves against the fluctuations in prices and then exercising at the time of transaction instead of making a physical transactions. Moreover, exercising the right provides a hedge against the increase in the price by generating positive return upon call option.

How does selling the put provide a hedge?

The put option provides the right to sell the underlying stock to the option holder at the strike price and it could also by exercised before the expiration date by looking at the trend of the market. In addition, the put option provides another method of securing and hedging the risk of the fluctuation in the stock prices.............

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