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Other strategiesHedging a portfolio is another way to use warrants. For instance if you have a portfolio of shares and expect the market to decline in the months ahead but do not want to sell each stock thereby potentially crystallising tax liabilities and incurring broker commissions you could simply buy a put covered warrant.
As the market falls the value of the portfolio is also likely to decline. However, the value of the put covered warrant would rise to 'hedge' or offset losses in the portfolio.
But which warrant would cover the portfolio? Well, the easiest example would be where the portfolio exactly mimics the FTSE 100. In that case you would buy a FTSE 100 put warrant.
Chances are it won't be that straightforward. And you will have to do a rough and ready estimate to how correlated your portfolio is to the FTSE 100.
Of course you could always hedge individual share declines by buying puts on them alone.
figure 7
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