Market Risk Management with Equity Derivatives

Abstract

This case delves into market risk management in an initial public offering (IPO) investment arising due to the unexpected onset of the pandemic. The protagonist in the case is overwhelmed by the euphoria surrounding the IPO issue of SBI Cards and turns into a speculator instead of a normal investor. He makes a leveraged bet on the likely listing gains by resorting to IPO funding. After the closure of the IPO issue, the market registered very sharp declines due to a viral fever engulfing the whole world. Now, the protagonist, who has already lost heavily from the existing portfolio, has to encounter likely losses from the loan-funded IPO investment. He had to hedge the likely losses from the possible listing day losses from the IPO. For this, he needs to put in place a hedging strategy, answering the questions on the choice of derivative contract, size and expiry date of the contract.