PalacioHill

No
Both are used to 'convert' a stock portfolio temporarily to a (synthetic or virtual) cash portfolio (thus earning RF instead of stock return) by shorting same number of futures.


You have a portfolio with beta = 1 and instead of selling it out for, say, 4 months before buying it back in again because you don't like the volatility of the next 4 months, you use this strategy to get synthetic cash for the next 4 months.

You use either of the formulae (see below) to calculate the number of futures required depending on what input you have from the exam text. The result should give the same number of futures.

1. (Mkt value of portfolio/Pf) * (1+RF)^t
2. (Mkt value of portfolio/Pf) /(index beta) (here assuming that portfolio beta = 1)



Edited 1 time(s). Last edit at Wednesday, May 11, 2011 at 05:18AM by elcfa.