Options for public funds managers

During the early 1980s, it was easy for public funds portfolio managers to earn high rates of return on public funds. However, with the general decline in interst rate in recent years, public funds managers have attempted to develop investment programs and strategies to provide value added to the return on public funds. Such programs must be developed within the context of the overall investment goals of the public entity. This paper discusses one investment strategy that can provide value added to a public funds portfolio and assist the public funds manager in dealing with interest rate risk and volatility. This paper explores the use of over-the-counter options on Treasury securities as an appropriate portfolio technique for public funds managers. A general discussion of public fund investment managment is provided along with an overview of the use of the over-the-counter options. Finally, a case study is presented which shows that a public funds portfolio’s return can be signficantly enhanced by the use of a well managed options program.