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As the debt equity ratio (i.e. leverage) increases, there is a trade-off between the interest tax shield and bankruptcy, causing an optimum capital structure, D/E*.The top curve shows the tax shield gains of debt financing, while the bottom curve includes that minus the costs of bankruptcy.
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, [1] many types of over-the-counter and derivative products, and futures contracts.
Testing must be performed on both elements of the hedge relationship to ensure that the risk mitigation value of the hedge would be effectively reflected in the insurees profit and loss ledger. "Effectiveness" measures the strength of this relationship; there are several [2] [3] generally accepted "measures of effectiveness":
Stack in Macintosh, one of a collection of documents created with HyperCard (as in a stack of virtual cards) Stack in LiveCode, one of a collection of program scripts created with LiveCode's Transcript programming language; Call stack, stack data structure that stores information about the active subroutines of a computer program
Finally, an active tail hedge manager guarantees constant effectiveness of the optimal protection by an active trading of positions and risk levels still offering significant convexity. When all these steps are combined, alpha , i.e. an investment strategy’s ability to beat the market, [ 8 ] can be generated using several different angles.
The superhedging price is a coherent risk measure.The superhedging price of a portfolio (A) is equivalent to the smallest amount necessary to be paid for an admissible portfolio (B) at the current time so that at some specified future time the value of B is at least as great as A.
A related term, delta hedging, is the process of setting or keeping a portfolio as close to delta-neutral as possible. In practice, maintaining a zero delta is very complex because there are risks associated with re-hedging on large movements in the underlying stock's price, and research indicates portfolios tend to have lower cash flows if re ...
Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. [1] This type of trading attempts to leverage the speed and computational resources of computers relative to human traders.