“The $5 million return based on a domestic equity index should be allocated such that $2 million is based on domestic stock and $3 million is based on foreign stock” (Institute 476) Institute, CFA. Level III 2013 Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. John Wiley & Sons P&T, 6/18/2012. vbk:9781937537371#page(476) One has to wonder what they were smoking. Is the domestic index supposed to also represent foreign equity?
it is a receive 5 Mill return on Equity -> which must be split up into 2M Domestic, 3 M Foreign -> so as to achieve final stock 60%, 40% allocation (to move from 7-3 on Stock to 9-6 on Stock) while simultaneously making a 50% bond/Stock split.
RIght, but shouldn’t the manager do two trades - one based on the domestic index, and one based on the foreign index?
most likely – but given the question stated this too “Explain how an equity swap could be used to implement this adjustment. You do not need to refer to specific stock indices.” – that was not needed.