i know for future contract, when asked for synthetic cash, we use Vp(1+r)^T/(pf*multiplier) for zero beta, we use betap*Vp/(betaf*pf*multiplier). but my question is: why the difference? isn’t zero beta equal to synthetic cash? Thanks
i think that you use beta when you’re changing between equity allocations?? good question…
I find the answer on volume 5 p333 1. The first is in the synthetic cash section: N = -V_p (1+R_F)^T/P_f Here, the stock portfolio has to be identical to the index. It cannot have a different beta. 2. The second one is in the adjusting portfolio allocation section: N = [(B_t - B_p)/B_f] *(V_p/P_f) B_t = 0 This is more general and can be used to eliminate the systematic risk on any portfolio. Note, however, that only systematic risk is eliminated.
so do you use formula 2 always if the equity portfolio you are converting to a synthetic cash position has a beta not equal to 1?