Fairfax Financial Holdings Limited Announces C$431,000,000 Bought Deal Financing

[ERICOPOLY]

This hindsight hedger says that he should have just bought an at-the-money index put and rolled it.  That would have cost a lot less.

 

Similarly, any private owner of FFH shares that didn't like the hedges could have done the same (purchasing at-the-money calls to offset the onslaught of losses from the look-through index shorts).

 

Next time he hedges, and you disagree, just buy index calls to put a max cap on your share of the potential hedging losses.

 

For a more exact hedge, you should just buy the product that prem shorts. Otherwise, if the equity price stays the same, you would lose on your calls (the time component) and break even on the index.

 

Way too dangerous. 

 

FFH could go down with the market at the same pace.  Then you are doubly screwed.

[SharperDingaan]

FFH strikes are deep out of the money, so the insurance cash costs are as cheap as possible; but FFH shareholders pay with high quarterly MTM adjustments. A valid approach. You're free to hedge FFH directly if you dont like it

[Ian L]

This hindsight hedger says that he should have just bought an at-the-money index put and rolled it.  That would have cost a lot less.

 

Similarly, any private owner of FFH shares that didn't like the hedges could have done the same (purchasing at-the-money calls to offset the onslaught of losses from the look-through index shorts).

 

Next time he hedges, and you disagree, just buy index calls to put a max cap on your share of the potential hedging losses.

 

For a more exact hedge, you should just buy the product that prem shorts. Otherwise, if the equity price stays the same, you would lose on your calls (the time component) and break even on the index.

 

Way too dangerous. 

 

FFH could go down with the market at the same pace.  Then you are doubly screwed.

 

Yes as we know the stock price is determined by Mr Market. Cancelling out the effect of the hedges on BVPS doesn't help to make the stock price more rational. If our aim was to get to a beta of 1 for the equity portion, then using the weighing method, it would be sufficient, but you are right that using the voting method we might end up with a beta of more than 1, especially if appetite for risk is driving the moves.

[Uccmal]

Fairfax raised the money because they had to.  Fortunately, it was raised above whatever BV is at.

They had to raise the money because the long shot bets aren't working well.  I'll never understand why they didn't collar their equity hedges early on when the hedging would have been very cheap. 

 

If the general market sinks, Resolute, BBRY, BKIR, and nearly all of their other investments would go down.  If FFH didn't drop immediately with the general market, it would soon enough when MTM losses are reported (within 3 months of the market crash).  Never mind that crashing markets are preceded by excessive margin debt.  People would be forced to sell down their FFh holdings to cover margin calls. 

 

No matter which way you look at this FFh will be much cheaper in a market crash than it is today.  If you have moved to cash along the way you will get a hedged FFh at a lower price than today. 

 

[wisdom]

http://www.bloomberg.com/news/2013-11-08/central-banks-renew-reflation-push-as-prices-weaken.html

 

central banks still attempting to ward off deflation. It is still a risk.