Page 130 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 6: Trading Strategies

Multi-strategy: Investment approach is diversified by employing various strategies Notes
simultaneously to realize short and long-term gains. Other strategies may include systems
trading such as trend following and various diversified technical strategies. This style of
investing allows the manager to overweight or underweight different strategies to best
capitalize on current investment opportunities. Expected Volatility: Variable.
Short Selling: Sells securities short in anticipation of being able to re-buy them at a future
date at a lower price due to the manager’s assessment of the overvaluation of the securities,
or the market, or in anticipation of earnings disappointments often due to accounting
irregularities, new competition, change of management, etc. Often used as a hedge to
offset long-only portfolios and by those who feel the market is approaching a bearish
cycle. High risk. Expected Volatility: Very High.

Special Situations: Invests in event-driven situations such as mergers, hostile takeovers,
reorganizations, or leveraged buy-outs. Investors May involve simultaneous purchase of
stock in companies being acquired, and the sale of stock in its acquirer, hoping to profit
from the spread between the current market price and the ultimate purchase price of the
company. May also utilize derivatives to leverage returns and to hedge out interest rate
and/or market risk. Results generally are not dependent on direction of market. Expected
Volatility: Moderate.

Value: Invests in securities perceived to be selling at deep discounts to their intrinsic or
potential worth. Such securities may be out of favour or under-followed by analysts.
Long-term holding, patience, and strong discipline are often required until the market
recognizes the ultimate value. Expected Volatility: Low – Moderate.

Self Assessment
State whether the following statements are true or false:

6. Hedge fund investors invest in equities expected to experience acceleration in growth of
earnings per share.
7. Profits from the market’s lack of understanding of the true value of the deeply discounted
securities.
8. Sells securities short in anticipation of being able to re-buy them at a future date at a lower
price due to the manager’s assessment of the overvaluation of the securities, or the market,
or in anticipation of earnings disappointments often due to accounting irregularities, new
competition, change of management, etc.
9. Investment approach is diversified by employing various strategies simultaneously to
realize short and long-term gains.

10. Short selling is surely permitted in many emerging markets, and, therefore, effective
hedging is often not available, although bad debt can be partially hedged via Indian
Treasury futures and currency markets. Expected Volatility: Very High.

6.5 Forward Contract

A forward contract is an agreement made today between a buyer and seller to exchange the
commodity or instrument for cash at a predetermined future date at a price agreed upon today.
The agreed upon price is called the ‘forward price’. With a forward market the transfer of
ownership occurs on the spot, but delivery of the commodity or instrument does not occur until
some future date. In a forward contract, two parties agree to do a trade at some future date, at a
stated price and quantity. No money changes hands at the time the deal is signed. For example,
a wheat farmer may wish to contract to sell their harvest at a future date to eliminate the risk of

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