Portfolio Insurance: Types of Risk in Fund Investing

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Table of Contents

Portfolio Insurance
Option
Types of Risk in Fund Investing
Reference List

Portfolio Insurance

The insurance business is a game of chances, they must plan their portfolio in such a way that they don’t run into a loss as prices change in the market. Their main investment area is the stock exchange that is subjected to external forces that affect the prices of the shares (Rajegopal, McGuin, and Waller, 2007). Portfolio Insurance is the strategy that is implemented to ensure that they don’t run at a loss. It involves short-selling stock index futures in the effort of hedging out the risk that is associated with the stocks that they hold. This method is, though, used mostly when the market is highly uncertain and volatile. It has the advantage that it offsets shortfalls in the stock but also has the disadvantage that it hinders any gain (Denney, 2005).

Option

The option is a right to buy or sell a specified security at a given price at a given time. Option takes different forms; a Pure option is an option contract that give the holder the right to buy or sell an asset at predetermined price within a specified period of time. These therefore are such investments created by investors that are bought and sold by the investor rather than the issuing company. They can further be classified into naked options, call options, covered options, and money options (Cooper, Scott and Elko, 1998). At the peak of financial global crisis, that is, in the year 2009, I was a shareholder of commonwealth bank of Australia. Due to the trade in the prices of the shares, I authorized my stockbroker to sell my shares when the price increased. This took two weeks but it was eventually successful.

Types of Risk in Fund Investing

Exchange rate risk/ currency

Some businesses engage in international trade directly. If the currency of the home country falls in value, then the business will suffer. This is because the amount that it will get from a conversion into the own country’s currency will be of a lesser value. There is not much that can be done to mitigate this however speculation can assist to some extent (Moteff, p. 34).

Country Risk

This is the possibility that the country of investment will hurt the business; this will range from political unrest to an economic deterioration of the country. There is a low-level risk in some countries especially the developed country for example Switzerland than in some developing countries like Zimbabwe.

Financial risk

This is the risk that the business will not be able to meet the long-term and medium-term financial obligations. This obligation means the financed capital obligation, the shareholders’ interests, and the cost of capital (Alexander and Sheedy, 2005).

Financial risk and currency risk are the most unease because it is the one that is more likely to happen in many circumstances. The investor cannot predict their occurrence correctly (Institute of Risk Management/AIRMIC/ALARM, 2002).

Country risk is not most likely to happen and thus I can take the risk with it, knowing the other risks are well mitigated. On the other hand, it is the loss that can easily be predicted. This is because the factors that lead to it are national and a wise investor can correctly predict them. An example of this is in cases of war (Moteff, 2009).

Reference List

Alexander, C. and Sheedy, E. (2005). The Professional Risk Managers’ Handbook: A Comprehensive Guide to Current Theory and Best Practices. New York: PRMIA Publications
Cooper, G.; Scott J., and Elko J. (1998). Portfolio Management for New Products. Reading, Mass.: Addison-Wesley
Denney, R. (2005). Succeeding with Use Cases: Working Smart to Deliver Quality. Boston, Mass.: Addison-Wesley
Institute of Risk Management/AIRMIC/ALARM, (2002). A Risk Management Standard. London: Institute of Risk Management.
Moteff, J. (2009). Risk Management and Critical Infrastructure Protection: Assessing, Integrating, and Managing Threats, Vulnerabilities and Consequences. Washington DC: Congressional Research Service. (Report).
Rajegopal, S., McGuin, P. and Waller, J. (2007). Project Portfolio Management: Leading the Corporate Vision. Basingstoke: Palgrave Macmillan

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