So I thought I knew this pretty well but going through the 3 day workshop question and got completely confused. I thought when we are creating synthetic equity and holding cash then use the risk free rate to increase the value being converted
when we are creating synthetic cash then dont use the risk free rate.
Can anyone please explain? Thank you!
Use the risk free rate (rf) to get the future value (FV). If the case facts say the money will be received in x months, that’s already the FV.
It seems to be that if we’re trying to adjust an asset allocation with futures/forwards and in the case of preinvesting you don’t compound to FV. If the question is about synthetic cash or equity then you do calculate FV.