Hedging Single concentrated stock postion
In the section 188.8.131.52 in reading 11 Concentrated Single Asset position the CFA book says that [content removed by admin]
In all four methods the investor who is long on ABC stock establish a short position. One of the goal of hedging as given in CFA book is that investor should not lead to “transferring the legal and beneficial ownership of ABC Corp stocks”.
I presume since it is a short position so investor has to ultimately settle the short position later on. Say in one of the technique where investor has borrowed 1 million shares of ABC Corp from broker and collected a proceed of $100 million by selling these borrowed stock, the broker will ultimately ask investor for returning his 1 million stocks.
At that point if the value of each unit of ABC Corp is say $150 then investor will have two options i.e. either return 1 million ABC Corp from his holding in which case he end up transferring the ownership of all his holding OR other option is to liquidate the diversified portfolio and then whatever shortfall remain cover it by giving some stocks from his long position in which case he end up transferring the ownership of some of his holding.
If each of unit is less than $100 say $80 then story is different and definatly investor’s holding of 1 million ABC Corp shares is protected.
So what is confusing me is that investor is not very much protected if stock price rises. So is this strategy good to hedge the concentrated position in single stock?