Abstract
This chapter discusses potential portfolio applications of Bund options specifically for the German market. It differs from the previous chapter in emphasis. Chapter 7 examined options in a tactical light. How call options could be used as substitutes for the purchase of a Bundesanleihe; how to buy puts to lock in gains or speculate on declines; how to sell call options to enhance yields by expecting volatility to decrease; and how to write cash-secured put options in anticipation of a better price in the underlying market. In this chapter, more emphasis will be placed on the strategic applications of options to Bund portfolio management. To do this, more time will be devoted to the concept of risk and return and how options allow the portfolio manager to restructure the patterns of his portfolio returns and control his risks. In addition, some of the most popular portfolio applications of options, namely the 90/10 money market and the 90/10 plus strategies, zero cost options, portfolio insurance and delta neutral strategies, will be explained. Finally, the chapter will conclude with examples of possible portfolio payoffs associated with the most popular futures and options hedging strategies. The first topic we will discuss is a popular call option buying strategy, known as 90/10.
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Notes
If one assumes the Capital Asset Pricing Model, the risk of a particular asset is its risk relative to the portfolio of all assets and this is called the Beta. For a thorough and simple introduction to these concepts, the reader should read Brealey, Richard and Stewart Myers, Principles of Corporate Finance 2nd Edition, 1984, McGraw-Hill, chapters 7, 8 and 9.
For a good introduction to the use of Bund futures in hedging a Bundesanleihen position, the reader is referred to Daniel Corrigan and Mark Pohlmann’s book Bunds and Bund Futures (The Macmillan Press Ltd, 1991).
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© 1991 Palgrave Macmillan, a division of Macmillan Publishers Limited
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Tompkins, R.G. (1991). Bund Option Portfolio Application. In: Bund Options. Finance and Capital Markets. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-12800-6_8
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DOI: https://doi.org/10.1007/978-1-349-12800-6_8
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-0-333-56910-8
Online ISBN: 978-1-349-12800-6
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