Hello,
Does anyone know why in the EOC #8 of reading 32 (page 267 printed) we use the formula NF = [(Bt - Bs)/ Bf] * (S/f), while on the Example 5 of the same reading (page 239 printed), we use a different formula to determine the number of futures contracts needed when we want to convert equity to cash synthetically?
Thanks!
Syn cash earnings the risk free rate.
I believe that the answer to #8 is incorrect because it does not take the risk-free rate into account. (Note that they probably should have had the risk-free rate of 0.5% in an exhibit ahead of describing scenario 2.)
If I were you, I would e-mail CFA Institute (info@cfainstitute.org) and point this out to them; they should publish an erratum.
The errata reads:
"In the information for practice problems 7-14 (page 266 of print), “Strategy 2” should read as follows: “Create a synthetic cash position by temporarily converting the US equity exposure in the fund into cash for a period of three months. The futures contract used to execute this transaction is based on the S&P 500.”
I find it odd they looked at this problem already but didnt identify another problem with it.
did you hear back from CFA Institute?
I’m with you re. example 5 and using that equation on EOC 8.