Why would an investor or business need risk protection using securities? Please define a security and name some types of securities or investing tools related to hedging losses or protecting gains?

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Why would an investor or business need risk protection using securities?   Please define a security and name some types of securities or investing tools related to hedging losses or protecting gains?

 

Student response

Ethan Hokanson

9:49pmOct 14 at 9:49pm

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Section 2(a)(1) of the Securities Act of 1933 defines a security as the following, “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, reorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposti, or group or index of securities (including any interest therein or based on the value thereof), or any put, call straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

 

There are a number of different securities that can be used in hedging strategies. Most of the products are some sort of derivative. Probably the most popular of these would be options trading. Options are the right to sell or purchase a stock at a given price. The first question is why? Why would even create a product like Options? I think it boils down to the coefficient of variance needed to achieve the desired outcome. Based upon a client’s desired rate of return, options provide opportunities to reduce that risk allowing clients to take on greater risk elsewhere to potential have a desired outcome of risk.