So when figuring out how many future contracts we are buying to increase beta/duration for our portfolios. How do I know when to take the future value of the numerator (position trying to hedge)? Sometimes they do it, sometimes they dont.
Is it just if they give me a time frame, or length of the contracts with a risk free, use the future value? And if we dont have any info on time horizon or risk free rate, we just leave it be and calculate it without future value?
I don’t believe I’ve seen a problem where you have to use a future value calculation. You either have reducing/adding exposure of a certain nominal amount, that does not need to be adjusted
Take a look at the article I wrote on synthetic positions (and also the others on adjusting beta and duration): http://financialexamhelp123.com/the-synthetics-cash-equity-and-fixed-income/.
The upshot is that if you start or end with cash, you use the future value; otherwise, you use the present value.
Thanks S2000, what are your thoughts of when you are changing part of your bond portfolio (duration from something to 0) to equities (beta from 0 to something)? Cause technically I guess you are converting the bonds to cash and then the cash to equities via futures right?
You’re quite welcome.
You’re only staying in cash for an instant, so you use the present value, not the future value.
Hi s2000,
By including the time factor (1+r)^t, say for cash to equity, do we mean we will create the equity position (by entering the future contract) some time in the future; or for equity to cash, we mean we enter into cash position (by selling future) some time in the future as well? Thanks.
Yes. To both.