Track 7 of 25

Concentration and hedging

Why one name and forty names are not the same collateral, why a haircut widens with size, and what a put, a collar, a prepaid variable forward and an exchange fund each do to the number the lender computes.

25 lessons

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Why one name and forty names are not the same collateralTwo accounts can hold identical dollars and offer a lender two different exits, and the exit is the thing being priced.6 min
Idiosyncratic risk and market risk, separatedA single price move has two causes, and only one of them can be removed by owning something else.6 min
What diversification actually removes, and what it cannotAdding holdings drives one component toward zero and leaves the other exactly where it started.7 min
Beta and residual variance, and which one the lender is pricingA market hedge addresses one half of the variance; a concentrated schedule is discounting mostly for the other half.7 min
Why a haircut widens as a position growsThe same asset carries two different discounts at two different sizes, because size is measured in exit time.7 min
Concentration measured as a share of collateralThe governing number is a ratio, and it can cross a threshold on a day you bought nothing and sold nothing.6 min
Why the blended advance rate hides the concentrated positionOne weighted average can describe two accounts whose collateral responds to a single event six times differently.7 min
Position size measured in days of trading volumeA position has a second size, quoted in days rather than dollars, and that is the one a schedule is built around.6 min
Why the exit window, not the price, sets the discountThe discount answers a question about days; volatility only converts those days into dollars.7 min
Correlated names are one name for haircut purposesCounting holdings measures nothing useful; what a schedule counts is how many independent things are present.7 min
Sector concentration and the lender's groupingA schedule can collapse several line items into one, so a ratio computed per holding can miss the limit entirely.7 min
A protective put: what it does to the distributionA floor rewrites every outcome below one price and leaves every outcome above it alone, minus a fixed amount.7 min
A protective put: what it does to the collateral valueThe floor is real and the schedule may not see it; both can be true of one position.7 min
What the put costs, expressed as an annual dragA premium quoted in dollars per share becomes a rate the moment you divide it by price and by time.6 min
A covered call: the premium and the capCash arrives now, and the shares become shares you may be required to hand over at a price fixed today.6 min
A collar: two legs, one bandTwo contracts define a range; inside it the outcome is yours, and outside it on either side it is not.7 min
Why a collar can raise an advance rate, and why it may notA band narrows the decline a lender must survive, but only a schedule that reads the band can price it.7 min
Why hedging a pledged position can reduce the lineLess risk and less capacity at the same time is not a contradiction; three separate mechanisms produce it.7 min
Margin on the hedge competes with the line itselfTwo claims sit on one pool of collateral, and the claim you created is the one that grows when prices move.7 min
A prepaid variable forward, mechanicallyCash arrives now against shares delivered years later, and how many shares depends on a price nobody yet knows.7 min
What a prepaid variable forward does to the pledge and to basisThe cash arrives like a loan, the shares stop counting as collateral, and the tax timing is separate again.7 min
An exchange fund, mechanicallyShares go in and units come out, so nothing was sold and nothing is separately yours any more.6 min
What an exchange fund costs in liquidity and in timeThe price is paid in years and in what a lender will count, rather than in a premium quoted per share.7 min
Basis risk: when the hedge and the holding divergeAn index hedge answers only the shared half of a move, and single names travel mostly in the unshared half.7 min
Four structures, one table of consequencesEach of the four changes downside, upside, collateral value, liquidity and horizon, and none of them changes only one.8 min

Educational only. Nothing in this track is investment, legal or tax advice, or a recommendation to enter into any transaction. Completion is stored in this browser and nowhere else.