Synthetic Equities and Cash

When does the dividend yield and risk free rate come into play for synthetic equities and synthetic cash? I see them listed as supplementary info in most questions, but I feel like they are rarely used and I get the answer right every time without ever addressing them. I feel like I just typically need the betas, contract futures price, etc…

Any help here on when/how dividends for synthetic equity and risk free rate for synthetic cash should be applied? I can clarify in more detail if you need me to.

Disclaimer: I will promptly forget any advice given by Saturday at 5pm.

You definitely need the risk free rate when equitizing cash, and this is highly testable. The dividend yield rarely comes into play and would be a real low blow if they tossed that into a question.

Use Rf to figure out the number of futures needed. Use the div yield to figure out the effective number of stocks you took exposure in thru the futures, calculated as: (N X F)/ (1+delta)^t = S This means that you could have taken a direct position in the stock paying a div yield of delta, but instead you decided to take the futures route, s.t. N X F amount of futures give you the same exposure as S number of stocks held for T. Tbh I only have a nebulous understanding of this (put in other words, it’s like holding a shit in while you’re running towards the bathroom), but hopefully it’ll be enough to clear any hurdle they throw on the exam on this.

Another screw ball in # of futures calcs is when the throw in the CTD bond, or a multiplier for the equity contracts. Watch out for those.

the RFR is what you put in the denominator to the t/T power

(1+div yield)t/T power times number of contrats is the deliverable value of the shares? and i think thats the only time you use div yield in these questions

also love it when theres a yield beta other than 1.0 nestled somewhere in fine print in the corner of the exibit

Thanks for the reminder - I need to review these!

Oh and don’t forget, this formula has a beta too.