Risk management in student-managed funds: Earnings announcements and the collar strategy
ISSN: 0307-4358
Article publication date: 5 September 2018
Issue publication date: 22 June 2020
Abstract
Purpose
Student-managed investment funds typically pursue “plain vanilla” objectives. The purpose of this paper is to demonstrate the value of adding option strategies to reduce the risk of equity positions around earnings announcements. The collar strategy is one such technique with the advantages of a low net cost and limited potential losses.
Design/methodology/approach
The authors provide recommendations for utilizing the collar strategy around earnings announcements. The authors also discuss how the value of this strategy is related to the literature on option pricing and earnings announcement returns.
Findings
Risk management strategies can enhance the pedagogical value of student-managed investment funds. The authors document how students have successfully utilized the collar strategy to immunize risk.
Originality/value
The collar strategy can enhance the pedagogical value of student-managed investment classes in several ways. First, students learn how to implement risk reduction strategies. Second, the proper implementation of these strategies requires students to learn the complex mechanisms associated with corporate earnings dissemination and analyst coverage. This also provides an opportunity to study earnings drift, which is a persistent and economically significant financial anomaly.
Keywords
Acknowledgements
The authors appreciate the research support from the Reiman School of Finance at the Daniels College of Business.
Citation
Hughen, J.C. and Lung, P.P. (2020), "Risk management in student-managed funds: Earnings announcements and the collar strategy", Managerial Finance, Vol. 46 No. 5, pp. 692-702. https://doi.org/10.1108/MF-05-2018-0198
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited