Synthetic Cash / Equity

Can anyone explain to me when we’re supposed to use the “synthetic equity formula” e.g. equitizing t-bills= (Vp*(1+Rf)^T)/(Pf*Multiplier) versus using the regular formula (moving beta up from zero) (Bt-0)/Bf * (Vp/Pf*multiplier) I don’t see a clear distinction regarding when to use one over the other?

When you are trying to alter your beta to 0 (close to cash), it is a very good aproximation to use the Bt-Bp/Bf * Vp/pf*mul formula, but a true cash allocation would use the Vp(1+rf)^t/pf*mult formula. However, when you use this latter forumla, the portfolio that u are synthically turning into cash must accurately be reflected by the composition underlying the equity futures contract. Hope this helps.

both formulaes require two different sets of inputs … i havent seen all of the inputs provided in any of the schweser mocks or samples … with the inputs provided in any Q, i feel only one of them is readily applicable. I go with that method.

^2009 CFAI mock had a question where you had the data for both

can u post how the question was framed…i don’t have the 2009 mock

Isaac Jeffries is concerned that U.S equities are about to suffer a sharp downturn and wants to convert his current holdings to cash for a period of 3 months. To achieve Jeffries’ objective, the number of U.S mid-cap equity futures contracts that Michael will sell is closest to… Then you have both sets of inputs, the answer uses the equitize cash formula…

There’s a long thread about this that I started a while ago - pretty good explanations by some people. Unfortunately, it didn’t stick for me and I just got a similar question wrong on a Schweser mock. Fucking frustrating.

The only thing that would give it away in that case would be the 3 month holding period. The only time I have seen it used is when they are looking for you to equitize/make synthetic cash in the portfolio. If you construct it this way your return will be the risk free rate over a 3 month time horizon. I agree, this is confusing though.