What do you mean by hedge fund, Financial Management

Assignment Help:

Q. What do you mean by Hedge Fund?

In the easiest strategy a hedge fund borrows Hong Kong dollars (HKD) and then sells them in the market against USD that is they short the HKD. Note that this will results the money supply to shrink. A reduce in money supply leads to an interest rates increase. Raise in interest rates have several effects on the stock market. First borrowing HKD to purchase stocks becomes more expensive.

2425_Hedge Fund have been playing a no-lose game.png

Therefore fewer investors would use margin. Second a raise in deposit interest rates will draw funds from stocks to deposits. Third interest rate raise are negative for businesses and their value will go down. Yet again stocks decline.

Alternatively higher interest rates lure more investors to park their money in Hong Kong boosting the currency. But they as well slam the stock market because rising rates hurt company's ability to borrow and expand.

However several of these Hedge Funds involved in the speculation didn't operate in the cash market. In its place they shorted the HKD in the futures markets. This doesn't require borrowing HKD. It is the counterparty who has to hedge the long HKD position that requires to borrow HKD from the banking system.

In the particular situation discussed here Hedge Fund managers believed that they were taking little risk

The hedge funds stake on the collapse of the peg. If the dowel breaks the HKD is expected to fall. Specified the psychology of those days the casual view was that the HKD was overvalued. The merely risk to Hedge Funds is that the peg holds.

Under these conditions their loss will be the dissimilarity between the initial cost of entering the trade to sell HKD in futures markets and the pegged rate. The reading proposed that this cost is low.


Related Discussions:- What do you mean by hedge fund

Financial mangement enviroment, 1. role financial intermediaries 2. nature ...

1. role financial intermediaries 2. nature and role of money markets

Determine the post-merger eps and post-mergershare price, Post-merger EPS a...

Post-merger EPS and post-mergershare price An estimated post-merger EPS can be calculated by: (Combined earnings) / total shares after merger An estimated post-merger s

Importance of mutual funds in the investment intermediaries, Define the imp...

Define the importance of mutual funds in the investment intermediaries. Mutual funds: Mutual funds pool resources by several companies and individuals and invest these re

Design, D esign, Drawing and Bill of Quantities (BOQ) for works We dis...

D esign, Drawing and Bill of Quantities (BOQ) for works We discussed about INCO terms which are set standards for the project. Now let us learn about other parameters for cont

Calculate the expected return and risk, QUESTION The Stock of Max Ltd ...

QUESTION The Stock of Max Ltd performs relatively well compared to other stocks during recessionary periods. The stock of Bax Ltd, on the other hand, does well during growth p

State the significance of the cost of capital, State the Significance of th...

State the Significance of the Cost of Capital It must be recognized at the outset that cost of capital is one of the most difficult and disputed topics in the finance theory.

LPP, A paper mill produces two grades of paper viz., X and Y. Because of ra...

A paper mill produces two grades of paper viz., X and Y. Because of raw material restrictions, it cannot produce more than 400 tons of grade X paper and 300 tons of grade Y paper i

Leverage, what is the meaning of market feasibility? What are its different...

what is the meaning of market feasibility? What are its different types with their degree?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd