Creating Cash out of Equity

So this wasn’t an actual question really, it was more curiosity?

Both. There was an actual question…the last question of sample exam 2. I tried to factor in the beta…the answer wasn’t one of the options. Then I rolled back the beta factors and I found the option…That was the correct answer as per CFAI. But, I still don’t think that’s the right answer. So, my curiosity is why is beta not factored in the calculations ? or is CFAI just plain wrong on this one ?

Like I said above, as far as I’m aware: - If you are Equitizing Cash - don’t need the Beta factor - If you are trying to convert S&P holdings/futures to “Synthetic Cash” - you need the Beta

P 111, Reading 38, Book 5. Read the text after Example 5. This had bothered me too. If you are equitizing cash, the future contract must have the same beta as the original stock. If you are changing beta, any future contract would do.

General Formula: # contracts = Btarget - Bportfolio/Bfutures * Vportfolio (1+rf)^t/Pf If you are changing your target beta, than utilize the beta of the futures. But if you are creating synthetic cash, that whole left side of the equation becomes meaning ess becasue you would have a zero as your target beta and thus a zero in the numerator. Just focus on the right side of the equation in that case.

Notes 29 on Volume 5 pg 111 explains why. It only works when the futures is based on the exact underlying stock in the portfolio. Futures beta = beta of underlying stock * present value interest factor using risk free rate = beta of underlying stock / (1+rfr)^T Therefore the two formulas are equivalent. Nf = [(0 - Underlying stock beta)/futures beta] * V/qf = - (1+rfr)^T * V/qf

Hmm, I wonder why futures beta needs to be discounted…