What does it mean when company executives hedges their shares? Is it simply a way to reduce risk, considering that in many cases executives have large exposure to their companies’ shares? Or is it a cynical but effective financial instrument that allows executives to make money off their companies’ poor performance?
In dealings last week, Discovery CEO Adrian Gore entered into a new hedging transaction over a portion of his shareholding in the company after the expiry of an instrument put in place in 2013.
As CFO Ricky Farber explains, the transaction was entered into with a bank. The put option provides protection from a slide in the price of the share, thus protecting the bank; the call option allows profit to be made, but to a certain ceiling.
"Over the years Discovery has had two rights issues. The rights issues gave shareholders a chance to buy more shares. [Gore] borrowed money from a bank to purchase the shares. The bank put a collar on them for security. The number of shares [Gore] has remains unchanged," says Farber.
About 8.7m options were hedged, half with a put strike price of R83.16 and the balance at a put strike price of R93.96. Settlement dates are from January 2020 to April 2020.
Gore simultaneously sold 8.78m call options at a strike price of R199.80 with the same exercise dates. The notional value of the transaction is about R1.76bn.