Question

What is a market neutral position? Why might investors be inclined to use a market neutral position? To what risks is an investor exposed if he or she utilizes a market neutral position? Is an investor exposed to relative swings in asset prices? Across-the-board swings in asset prices? Be sure to provide me with a mathematical example of a market neutral approach which addresses how money is made, lost, and protected, depending on the movement of prices.

Answer 1

• MARKET NEUTRAL POSITION:

An investment or portfolio is said to be market neutral, if it avoids certain kind of risk which helps to initiate certain kind of gains for the portfolio.It is typically uses the hedging policy. To reach at the market neutral position it requires to specify the certain kinds of risk go be avoid. Convertible arbitrage is one kind of it.

• An investor should be inclined to use market neutral as sometimes equity market neutral can be outperform as the hedging could be affected by the long term effect of the wide sector wise performance of investment.
• In two ways an investor can expose market neutral position :

1. Delta Neutral: An investor should maintain their portfolio to unchanged value of the portfolio which is closest to small changes to the value of underlying asset . An investor should uses the delta closest to zero as the complexity of hedging gets releases as soon as possible.
2. Paris Trade: By using virtual trading conditions like uptrend ,downtrend or sideways movement ,an investor can reach to the statistical arbitrage or convergence trading strategy .

• Yes, an investor shall expose relative swing between asset prices.suppose, you want to add an extra asset to your portfolio, now if you exercise the actual volatility happens between the asset price ,then only you could find the difference between the price is uprising or downgrading at the same time ,so it will help you to judge ,whether you will get any hedging benefit in future from buying it at current price . So swinging between the asset price could help you to have a positive gain in future from that asset.