Practice Schweser Exam Vol2, Exam 2PM, Q19.1

Appreciate anyone who could shed some light on this. Thank you! Practice Exam Vol. 2, Exam 2PM Question 19.1, p.293 Why must we sometimes apply the future’s time to maturity (5 months) to the portfolio value and sometimes do not? how do we know when to do it? The question paragraph never said that since the 200-day moving average is sending a bearish signal, UCB management decided to “immediately” neutralize its equity position. It never mentioned planning to do that in 5 months. Is this answer guideline a mistake?

uppppp the old question. Pls help me…

why Question 19.1 guideline uses future value - V(1+rf)^T while 19.3 do not ???

If you observe it …Its the same formula but since Equity beta = future beta, its not shown in 19.1

19.1 (Bt - Bp) / Bf * (Vp *(1+Rf)^t

Target Beta = 0, Bp=1, Bf = 1 so eqn becomes = - Vp (1+Rf)^t / Pf*Multiplier

Normally time horizon is given in question in which Manager wish to neutralize, here it only said its bearish on the equity market hence wish to neutralize the position.

Time to expiration of the available futures is 5 months. So if they continue to neutralize by holding short futures at max they can do it for 5 months.

One more thing, they should have used index dividend yield since its given otherwise it is ignored

Thanks for promly reply, but what i mean is in both case, the manager need to neutralize current amout of 3bil (19.1) and 3.25bil (in 19.3) and the future price is 1058 which expire in 5m. Why the 3bil in 19.1 is multiplied (1+rf)^T while 3.25bil (in 19.3) is not?

19.1…Expectations are bearish…Mgr neutralizing eq by Shorting futures so that any movement in spot is offset by the futures movement…as a result you only earn risk free (so V* (1+Rf)^t

19.3…Modification of asset allocation…Bonds currently is 88% of the portfolio which is to be reduced to 75%…so to adjust synthetically, one need to sell bond futures & BUY eq futures.

thank you so much,