Synthetic Cash

CFA Level III
#1

An investor wants to create a synthetic cash from his portfolio, but the beta of the portfolio is different from the beta of the benchmark index. Will the beta’s be used in the formula?

#2

no

#3

1+R to the T HELD SHUN

#4

equitize cash: portfolio value(1+rf)t/(multipler)(futures price)

#5

Can’t we do this with beta too? [(Bt - Bp)/Bf]*(V/PF)

#6

No, this is the issue with creating synthetic cash as the return of the portfolio may not match the return of the index used to hedge. It’s what they call Basis Risk.

#7

sure betas will be used and depends if futures beta includes the PV factor

#8

Since he said synthetic, I’d use the formula with the RF rate. [-V(1+rf)^t]/qf

#9

[V(1+rf)^t]/qf synthetic cash to equity forluma is the same as synthetic equity to cash except for the long/short (+ or -) part, right???

#10

FinNinja Wrote: ------------------------------------------------------- > No, this is the issue with creating synthetic cash > as the return of the portfolio may not match the > return of the index used to hedge. It’s what they > call Basis Risk. Thanks, ninja.

#11

june2009 Wrote: ------------------------------------------------------- > /qf > > > synthetic cash to equity forluma is the same as > synthetic equity to cash except for the long/short > (+ or -) part, right??? Right

#12

if you want to know correct answer to this question, read V5 363 page pls.

#13

pfcfaataf Wrote: ------------------------------------------------------- > if you want to know correct answer to this > question, read V5 363 page pls. Thanks, pfc. …agreed it’s as simple as it looks, I had that page half highlighted…

#14

That this formula [-V(1+rf)^t]/qf should be used ONLY when the portfolio EXACTLY matches the index. Apparetly this is not the case here, so the formula with the betas should be used. As pfc noted, refer to the CFAI text.

#15

deriv108 Wrote: ------------------------------------------------------- > pfcfaataf Wrote: > -------------------------------------------------- > ----- > > if you want to know correct answer to this > > question, read V5 363 page pls. > > Thanks, pfc. …agreed it’s as simple as it looks, > I had that page half highlighted… Read page 363, but still not clear. I did not see a direct answer to this q… Can someone explain?

#16

You use this formula: (Mkt value of portfolio*portfolio beta/Pf) /(index beta), i.e., a special case of the (bT - bp)/bf x (Vp/Pf) formula. Otherwise, read this post http://www.analystforum.com/phorums/read.php?13,1250681,1251139#msg-1251139