LOS e, (Part 2): Demonstrate the use of futures to gain exposure to an asset class in advance of actually committing funds to the asset class.

Q1. A portfolio manager has a net long position in both stocks and bonds and no cash. When pre-investing a future cash inflow, to replicate the existing portfolio, using bond and stock futures, which of the following will most likely be TRUE? The manager will:

A)   go long the stock futures but short the bond futures.

B)   have to choose a single futures contract and net the bond and stock position.

C)   go long both stock and bond futures.

Q2. A portfolio manager knows that a $10 million inflow of cash will be received in a month. The portfolio under management is 70% invested in stock with an average beta of 0.8 and 30% invested in bonds with a duration of 5. The most appropriate stock index futures contract has a price of $233,450 and a beta of 1.1. The most appropriate bond index futures has a duration of 6 and a price of $99,500. How can the manager pre-invest the $10 million in the appropriate proportions? Take a:

A)   short position in 25 of the bond futures and 22 of the stock futures.

B)   long position in 22 of the stock futures and 25 of the bond futures.

C)   long position in 25 of the stock futures and 28 of the bond futures.

Q3. The practice of taking long positions in futures contracts to create an exposure that converts a yet-to be received cash position into a synthetic equity or bond position is:

A)   called leveraging down.

B)   illegal.

C)   called pre-investing.

LOS e, (Part 2): Demonstrate the use of futures to gain exposure to an asset class in advance of actually committing funds to the asset class. fficeffice" />

Q1. A portfolio manager has a net long position in both stocks and bonds and no cash. When pre-investing a future cash inflow, to replicate the existing portfolio, using bond and stock futures, which of the following will most likely be TRUE? The manager will:

A)   go long the stock futures but short the bond futures.

B)   have to choose a single futures contract and net the bond and stock position.

C)   go long both stock and bond futures.

Correct answer is C)

Since the original portfolio is long in both stocks and bonds, the manager will go long both stock and bond futures contracts.

Q2. A portfolio manager knows that a $10 million inflow of cash will be received in a month. The portfolio under management is 70% invested in stock with an average beta of 0.8 and 30% invested in bonds with a duration of 5. The most appropriate stock index futures contract has a price of $233,450 and a beta of 1.1. The most appropriate bond index futures has a duration of 6 and a price of $99,500. How can the manager pre-invest the $10 million in the appropriate proportions? Take a:

A)   short position in 25 of the bond futures and 22 of the stock futures.

B)   long position in 22 of the stock futures and 25 of the bond futures.

C)   long position in 25 of the stock futures and 28 of the bond futures.

Correct answer is B)

The goal is to create a $7 million equity position with a beta of 0.8 and a $3 million bond position with a duration of 5:

number of stock futures = 21.8 = (0.8 ? 0) × ($7,000,000) / (1.1 × $233,450)

number of bond futures = 25.13 = (5 ? 0) × ($3,000,000) / (6 × $99,500)

The manager should take a long position in 22 of the stock index futures and 25 of the bond index futures.

Q3. The practice of taking long positions in futures contracts to create an exposure that converts a yet-to be received cash position into a synthetic equity or bond position is:

A)   called leveraging down.

B)   illegal.

C)   called pre-investing.

Correct answer is C)

This is the definition of pre-investing using futures contracts, and it is not illegal.

Thx!