Prepaid Variable Forward vs. Forward Conversion with Options

CFA Level III
#1

Is there any difference between the two? The way I am reading it they appear to be the same thing.

#2

Hi Dan, Where is it in the curriculum?

#3

Both are in Volume 2 of the CFAI curriculum.

Prepaid Variable Forward: p. 330

Forward Conversion with Options: p. 345

#4

I think the difference is the loan. In a prepaid variable forward you get a " prepayment of the forward" so to say because you get a loan. The forward conversion with option puts the investor in a good position to obtain a loan. But the loan as such is not included in what we call the forward conversion with option That’s how i understand it

#5

CFA1 2014 - Q 2-D (Forward conversion with options)

Purchase of a put

sale of a call

with same excercise and maturity date.

Because this position is perfectly hedged (riskless) he can borrow against it at high LTV.

#6

I’m confused as well. Is prepaid variable forward really a “forward” or an option combination?

#7

A forward conversion with options uses options (eg, sell call, buy put) to hedge value. In a PVF the owner of the shares borrows money against the shares and then delivers them in the future to pay back the loan. If the shares are more valuable in the future the owner may not have to deliver all the shares, but that is specified in the contract.

#8

Also can somebody please highlight the difference between a “Forward Coversion with options” and a “Long Stradlle”. Both seem to be long put+long call as per description.

#9

^ Forward coversion with option is long put + sell calll.

#10

Thanks Frank!

#11

i hate these with a passion

#12

this guys knows!!