• 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 ...