The Benefits of Insured Stocks for Corporate Cash Management

 

Keith C. Brown

Meir Statman

 

Advances in Futures and Options Research 2, 1987, pp. 243-261

 

 

Abstract

                       

Corporate cash managers are more concerned with capital preservation than with high expected returns, as evidenced by their preference for short-term risk-free securities with low returns over risky stocks.  However, in this paper we argue that corporate cash managers do not have to choose between risk-free and very risky securities.  Options offer the opportunity to create risk and return combinations that cash managers may prefer to either extreme position.  In particular, we show that insured stock positions, combining the holding of a put option on a stock or stock index with the underlying equity position, can be an appealing alternative.  Insured stocks offer cash managers a choice from a range of predetermined minimum returns.  Some of these minimum returns are negative while others are positive.  Thus, capital preservation is possible.  At the same time, the expected returns on insured stocks are higher than those of risk-free securities.

 

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