The Study Of Hedge Portfolio Based On Securities Lending And Call Warrants

In this thesis, I combine the recently permitted margin trading with call warrants to establish arbitrage portfolios. The main idea is as follows. Assume there is an underpriced call warrant with underlying stock traded in the security loan market. By buying certain amount of this call warrant while short selling same amount of its underlying stock, a positive amount of wealth is remained for other investment. On the other hand, on the expiration date, we exercise this warrant and close out the short= position in underlying stock by the obtained stocks. As a result, we can make profit from the whole arbitrage strategy above. Due to the existence of transaction costs, the feasibility of this arbitrage strategy depends on how much the call warrant is underpriced. In order to find out the investment opportunities in the market, I calculate the least bound of the non-arbitrage interval for the strategy mentioned above with no-arbitrage asset pricing principle.First I consider a simple case of this arbitrage strategy which rules out the possibility of forced liquidation and proactive close position. In this case, the arbitrage portfolio-has the same characteristics with fixed-income products in the financial market such as bonds, which lock the future payoff at the beginning of the trade. Since there are already plenty of mathematical theories, as well as a complete system of indicators and methods, proposed in the fixed-income research area, I choose to inherit this= system in our study for the purpose of standardization. For instance, by transplanting the definition of yield and yield curve, I can analyze the payoff of this newly designed arbitrage strategy.However, our fixed-income-like model still has a lot of uncertain factors which could not only influence the benefit in future, but also endanger the maintenance of the portfolio. For the security of this investment, the design of a dynamic management strategy is of great importance in our following study. I take account of all sorts of scenarios in the process of our investment and design solutions respectively. Based on the valuation of asset in future, the investor could either choose to maintain the portfolio by providing additional margin or close the position ahead of schedule by selling the call warrant and terminating the securities loan. Moreover, for the convenience of daily dynamic management, I design a flow diagram which guides the investor to the right direction in the uncertain market.All investments have potential risk which reduces their estimated benefit, not to mention our portfolio which is based on securities lending. Just like the excess earnings locked in the future, the risk of my portfolio comes from the margin trading, which is also the premise of its establishment. For the purpose of prospecting the risk and controlling it within a relatively low level, I calculate the probabilities of different forced liquidation for our portfolio by the method of VaR based on historical price records. I give the probability distribution of the highest levels that stock price will reach during a certain period of time in future, and then the security deposit needed at most could be calculated by the contract of securities lending. With different degrees of tolerance and preference for risk, investors could make their own decisions and prepare corresponding amount of security deposit. Finally, I also draw the curve of VaR on MATLAB, so that the balance between benefit and risk could be seen clearly.Although this model is feasible in theory, a subsistent investment target needs to be found in order to put the strategy into practice, which means that we should find out a stock in market that matches all the conditions of our model. Fortunately, there is a perfectly-matched call warrant for my arbitrage model, namely JiangtongCWB1, of which the vesting date is October 4,2010. So I have plenty of history data to testify the effectiveness of the arbitrage model. After establishing the portfolio, I calculate the aforementioned parameters which are of great importance in the process of dynamic-management. By the guidance of these decision parameters, a clear management strategy is made and an opportunity is found. I finish the investment by closing the position ahead of schedule, which realizes a high return about 20%. This means the arbitrage model established by this thesis really works both in theory and on practice.