Equitizing cash/ creating cash out of equity

Zanalyst · April 9, 2013, 2:18am

Finding it a bit confusing with the above topic. When do we use the fv of the amount divided by multiplier etc.Vs using the target beta of stock equal to 0/cash equivalent minus current beta devided by futures beta etc.?The way I do it is if the question does not include beta then the question asks for the fv of the amount formula. Why cant we use the beta formula to equitize our portfolio?

cpk123 · April 9, 2013, 2:29am

Equitizing Cash

bcos you do not have a portfolio

you have cash on hand.

now you want to get equity exposure with the cash on hand.

Long futures contract + Long Cash = Long Stock market exposure.

Converting Equity into Cash

Long Stock + Short Futures = Long Risk Free Bond (Cash)

and why is this different from the selling futures with a beta position – read the middle passage on Pg 334.

You might be wondering about the relationship between the number of futures contracts given here and the number of futures contracts required to adjust the port- folio beta to zero. Here we are selling a given number of futures contracts against stock to effectively convert the stock to a risk-free asset. Does that not mean that the portfolio would then have a beta of zero? In Section 3.2, we gave a different formula to reduce the portfolio beta to zero. These formulas do not appear to be the same. Would they give the same value of Nf? In the example here, we sell the precise number of futures to completely hedge the stock portfolio. The stock portfolio, however, has to be identi- cal to the index. It cannot have a different beta. The other formula, which reduces the beta to zero, is more general and can be used to eliminate the systematic risk on any portfolio. Note, however, that only systematic risk is eliminated. If the portfolio is not fully diversified, some risk will remain, but that risk is diversifiable, and the expected return on that portfolio would still be the risk-free rate. If we apply that formula to a portfolio that is identical to the index on which the futures is based, the two formulas are the same and the number of futures contracts to sell is the same in both cases.

Zanalyst · April 9, 2013, 3:24am

So is it safe to assume that we use the fv formula 1) when we do not have a portfolio 2) when we have an index we want to invest in?

dingying85 · April 10, 2013, 3:17am

what does long cash mean, if having cash on hand, i guess just use the cash to buy equity futures?

Zanalyst · April 10, 2013, 3:50am

Long cash = long risk free bond.

Nik2804 · May 7, 2017, 2:33pm

Guys, i saw in a sample exam in 2013 the Mary Bing case scenario where it was giving a beta of the Future contract and when it made the calculation in equitizing 15million it did not include in the denominator the beta of the the future. Have you seen anything like this or should i suppose that it was a wrong solution?

In the cfa book in derivatives page 239 and 240 it uses a future contract without a beta so the calculation is easy. If we get a future contract with its own beta should we use it in the denominator?

nosaejohn · June 16, 2018, 1:25pm

i found this confusing too. I dont understand why the solution does not include the beta calculation

PreDRaR66 · June 16, 2018, 1:58pm

Aren’t there some topic tests questions that have a future beta assumed to be different than the portfolio and it’s used?