Photo/Zhang Jian

Jan. 14 (NBD) – Though China's automaker Zhejiang Geely Holding Group (Geely) denied the report that it sold shares in Daimler AG (Daimler), analysts say the collar option Geely adopted when purchasing shares of the German giant could bring huge risk as the latter's stock price continues to drop.

A person with knowledge of the matter told NBD Geely's collar option strategy has low risk and brings moderate gains, and it's a tool protecting long-term strategic shareholders from unlimited downside risks.

Simply speaking, collar option caps the maximum gains and sets limits for maximum losses, fixing the range like collars encircling necks, hence the name "collar" option.

Previously Bloomberg reported Geely cut half of its stake in Daimler, and following media analysis held the financial derivatives Geely used in the purchase is highly risky.

Geely responded in an announcement that it has no plan to cut its holdings in Daimler. It also pointed out the analysis misunderstood the nature of collar option. 

Li Donghui, board member and CFO of Geely told NBD that Geely underwent strict assessment with foreign investment banks when structuring the collar option, and concluded there would be basically no risk for Geely even if Daimler's price fluctuates.

Geely emphasized several times that the purchase is a long-term and strategic investment, with stock returns being just one motivation.

What Geely deems more important is the further cooperation between the two parties. The two companies announced on October 24 last year the decision to set up a joint venture to provide high-end ride-hailing service. Brands owned by Daimler, including Mercedes-Benz and Mercedes-Maybach, will be deployed by the joint venture. High-end electric vehicles manufactured by Geely will also be used in the future.

On February 24, 2018, Geely confirmed it had purchased 9.69 percent of Daimler's shares worth about 7.3 billion euros (8.34 billion U.S. dollars), making itself Daimler's largest single shareholder.

The price of Daimler decreased from 71.62 euros (81.89 U.S. dollars) on February 23 last year to 48.92 euros (55.93 U.S. dollars) on January 11.

Email: limenglin@nbd.com.cn