2009 Level III Mock Exam: question 47:
To monetize equity, one has to use the formula N_f = V_o * (1+r) ^T / (qf) = 75000000*(1.04)^.25/(2350*100)=322
2010 Level III Mock Exam: question 46:
To monetize equity, here we have to use the formula N_f = ((beta_T - beta_0)/(beta_f))*(s/f) = ((0-.95)/1.15)*(60000000/117475) = 421.9
How do we decide which formula to use when?
did 2010 mock specificly state “equitize”? or did the question asks to simply hedge the position?
first calculation is really about equitizin.
second part is mostly about hedging or shifting assets.around
In both questions, they talk about “converting to cash for 3 months”.
In q 47 2009 - they have a client who has 75 Mill - convert to cash -> this they have solved using the equitize cash approach. they also gave u the risk free rate.
In Q 46 2010 - the client has a mixed porfolio 60 Mill Stock, 25 Mill Bonds - and they want to convert to cash, no risk free rate provided. So they have used the reduce beta to 0 formula.
so are we of the opinion that the effect is the same (i.e. to neutralize any equity position and to earn the rfr), its just a matter of technique so it depends on what inputs they give you?
No. the effect is not the same. That is what I was asking about. The results from two formulae are different. So it can cause trouble if both answers are among the choices, and you have all the inputs in the question - the risk free rate and all three beta’s.
Actually, in Q46, 2010, they gave McAulay duration and Modified duration for treasury bonds futures, so you could back out the risk free rate from those.
Can you post both the 2009 and 2010 afternoon mock exams please. Thanks