Can anyone explain to me when we're supposed to use the "synthetic equity formula"
e.g. equitizing t-bills=
(Vp*(1+Rf)^T)/(Pf*Multiplier)
versus using the regular formula (moving beta up from zero)
(Bt-0)/Bf * (Vp/Pf*multiplier)
I don't see a clear distinction regarding when to use one over the other?作者: Valores 时间: 2011-7-13 00:45
When you are trying to alter your beta to 0 (close to cash), it is a very good aproximation to use the Bt-Bp/Bf * Vp/pf*mul formula, but a true cash allocation would use the Vp(1+rf)^t/pf*mult formula. However, when you use this latter forumla, the portfolio that u are synthically turning into cash must accurately be reflected by the composition underlying the equity futures contract.
Hope this helps.作者: NakedPuts00 时间: 2011-7-13 00:56
both formulaes require two different sets of inputs ... i havent seen all of the inputs provided in any of the schweser mocks or samples ... with the inputs provided in any Q, i feel only one of them is readily applicable. I go with that method.作者: oneboy 时间: 2011-7-13 01:07
^2009 CFAI mock had a question where you had the data for both作者: mar350 时间: 2011-7-13 01:18
can u post how the question was framed...i don't have the 2009 mock作者: mik82 时间: 2011-7-13 01:30
Isaac Jeffries is concerned that U.S equities are about to suffer a sharp downturn and wants to convert his current holdings to cash for a period of 3 months.
To achieve Jeffries’ objective, the number of U.S mid-cap equity futures contracts that Michael will sell is closest to...
Then you have both sets of inputs, the answer uses the equitize cash formula...作者: Analti_Calte 时间: 2011-7-13 01:41
There's a long thread about this that I started a while ago - pretty good explanations by some people.
Unfortunately, it didn't stick for me and I just got a similar question wrong on a Schweser mock.
The only thing that would give it away in that case would be the 3 month holding period. The only time I have seen it used is when they are looking for you to equitize/make synthetic cash in the portfolio. If you construct it this way your return will be the risk free rate over a 3 month time horizon. I agree, this is confusing though.
