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
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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