Returns earned by hedging with utility warrants

Journal Article · Thu Nov 04 04:00:00 EST 1976 · Public Util. Fortn.; (United States)

OSTI ID:7347707

Mayo, H B

The author has formerly recommended hedges that would be achieved by buying the utility's stock and shorting the company's warrants (Public Utilities Fortnightly, Sept. 28, 1972). The prime advantage of such hedging was said to be that it offered the investor a modest return with virtually no risk. A review of these investments shows that the hedges employing American Telephone and Telegraph Company stock and warrant did superbly, earning over 15 percent annual yield, but the hedges employing the stock and warrant of Continental Telephone Company did poorly. The reasons for this poor performance offer a major lesson in hedging. This article reports the returns earned on the hedge positions suggested in the initial article, explains the reasons for the poor performance of the Continental Telephone hedges, and suggests a current means to hedge profitably. This article is organized into three sections. The first section briefly covers hedging with options and in particular with warrants. The second section reports the returns earned by the hedges suggested in the original article and discusses what went wrong with the Continental Telephone hedges. The last section suggests how the investor may avoid this problem by the use of call options currently being offered on the Chicago Board Options Exchange and other stock exchanges. (MCW)

• Research Organization: Rider Coll., Lawrenceville, NJ
• OSTI ID: 7347707
• Journal Information: Public Util. Fortn.; (United States), Journal Name: Public Util. Fortn.; (United States) Vol. 98:10; ISSN PUFNA
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200* -- Energy Planning & Policy-- Economics & Sociology
ECONOMICS
INCOME
INVESTMENT
PUBLIC UTILITIES
RECOMMENDATIONS