Analyzing Alternative Hedging Strategies

Abstract

The author starts by suggesting that, for investors who remain bullish about the future performance of their stock holding, but who also recognize the need for increased diversification, hedging is a viable alternative. He suggests that the primary hedging techniques involve the use of equity collars or variable prepaid forwards. Arguing that variable prepaid forwards are a superior approach, the author turns to the question of determining which particular VPF strategy is best for a given investor situation. The article presents an analytical framework for comparing alternative variable prepaid forward hedging strategies, and lays out a process for determining which strategy is best, given the investor's goals and objectives.