BUSI 538 Week 4 Discussion Board 1: Reply Posts Example

Discussion Board 1: Reply Posts

BUSI 538 Investments and Derivatives, Discussion Board 1: Reply Posts

Thread by [Student Name]

The two classmates and their threads are composites; the textbook, research and Scripture cited are real, and the requirements follow Liberty's public course guide for BUSI 538.

Reply to Leah

Leah, your thread made a thoughtful case that the third servant's caution was understandable and that a Christian saving for retirement might reasonably keep most of the money in money market funds to avoid losing what God has provided. I agree that preserving capital is a real responsibility, and you were right that money market instruments carry very little default or price risk. I want to suggest, though, that for a retirement horizon of 25 or 30 years, money market funds protect against the wrong risk.

Bodie et al. (2017) stress the difference between nominal and real returns. A money market fund that yields 4 percent while inflation runs at 3 percent leaves a real return of about 1 percent before taxes, and in many past periods real returns on Treasury bills have been close to zero or negative. Over three decades, a portfolio earning almost nothing in real terms will buy little more in retirement than it would today. The risk that matters for a long-term saver is not a bad year in the market; it is reaching retirement without enough purchasing power.

Campbell and Viceira (2001) make the point more precisely. They show that for a conservative investor with a long horizon, short-term bills are not actually the riskless asset, because the investor must keep reinvesting at whatever interest rates prevail, and those rates can fall. The truly safe asset for such an investor is a long-term bond protected against inflation, which locks in a known real return for the whole horizon. In the United States, Treasury Inflation-Protected Securities fill that role. Their research suggests that a cautious retiree-to-be should hold long-term inflation-indexed bonds, not cash, as the core of the safe portion of a portfolio.

Scripture seems to support spreading resources rather than keeping them idle. Ecclesiastes encourages us to send out our bread upon the waters and to give a portion to seven, or even eight, because we do not know what disaster may come upon the land (English Standard Version Bible, 2001/2016, Ecclesiastes 11:1-2). The Teacher's counsel is humility about the future expressed through diversification, not withdrawal. Putting all of one's savings in the asset that feels safest is a single bet that inflation and interest rates will cooperate.

It is also worth remembering that the master in the parable did not ask the servants to guarantee a result; he asked them to put what they had been given to work. None of this means you should accept more stock risk than you can bear. A diversified mix of inflation-protected bonds, broad stock funds and a modest cash reserve could honor both your caution and the parable's call to productive use. Would you consider moving the long-term part of your savings into inflation-protected bonds while keeping cash for near-term needs?

Reply to Josh

Josh, your thread argued that derivatives have no place in a Christian's investment strategy because options are a form of gambling: the buyer bets on a price move and usually loses the premium. I agree that buying options purely to bet on short-term price moves resembles gambling, and the evidence suggests it is a losing game on average. But I think the textbook gives us reason to distinguish that use from hedging.

Bodie et al. (2017) describe two common strategies that reduce risk. A protective put combines a stock with a put option, guaranteeing a minimum selling price; the investor pays a premium, as with insurance, in exchange for limiting losses. A covered call combines a stock with a written call, giving up some upside in exchange for income. Neither is a bet; both change the shape of the investor's possible outcomes, usually to make them less extreme. A collar, which pairs a protective put with a written call, can even be arranged so that the premium received pays for the protection, leaving the investor with a known range of outcomes at little upfront cost. Farmers and manufacturers use futures and options in the same spirit to fix prices for crops and raw materials, which is the hedging role the textbook describes for derivatives markets as a whole.

Research on option returns supports your concern about speculation while clarifying what buyers pay for. Coval and Shumway (2001) studied returns on index options and found that puts earned very negative average returns and that zero-beta straddle positions, which profit only from large moves in either direction, lost roughly 3 percent per week on average. Investors buying these positions were paying a large price for protection against crashes and volatility. For a speculator, that is a reason to stay away, because the expected loss is built into the price. For a retiree who cannot afford a large loss in the year before retirement, paying that price may be a reasonable choice, just as paying for homeowner's insurance is reasonable even though the insurer expects to profit.

Proverbs draws the same line between prudence and greed. It commends the prudent person who sees danger and hides, in contrast to the simple who keep going and suffer for it (Proverbs 22:3), and it warns that a person in a hurry to become rich will not go unpunished (Proverbs 28:20). A protective put is a way of seeing danger and taking cover. Buying short-dated calls in the hope of a quick fortune fits the second proverb.

So I would refine your conclusion rather than reject it: options used as insurance can be part of faithful stewardship, while options used as lottery tickets should be avoided. Would you see a protective put on a concentrated stock position, such as employer stock in a retirement account, differently from buying calls on a stock you expect to rise?

References

Bodie, Z., Kane, A., & Marcus, A. J. (2017). Essentials of investments (10th ed.). McGraw-Hill Education.

Campbell, J. Y., & Viceira, L. M. (2001). Who should buy long-term bonds? American Economic Review, 91(1), 99-127. https://doi.org/10.1257/aer.91.1.99

Coval, J. D., & Shumway, T. (2001). Expected option returns. The Journal of Finance, 56(3), 983-1009. https://doi.org/10.1111/0022-1082.00352

English Standard Version Bible. (2016). Crossway. (Original work published 2001)