The question asks us to “Create a synthetic cash position by temporarily converting the US equity exposure in the fund into cash for a period of three months.”
However, the solution tells us the numerator is the PV of the cash position. The general formula for synthetic cash position tells us to calculate futures contracts based on the FV of the cash position. Should the numerator therefore not be calculated as $350 million x (1.005)3/12 = $350.4 million?
Bump. Would like to know this too, in case someone found a solution. Didn’t find it in the CFA III errata, so guessing there is some kind of twisted explanation to this?
you want to convert what you have in the equity fund NOW into cash for a period of 3 months.
So why would you go FV of the cash required?
I am just reading … “Create a synthetic cash position by temporarily converting the US equity exposure in the fund into cash for a period of three months.” this statement - and the above is based on that.
Read the question again including the * under Exhibit 1, and read page-240 (para after the blue box eg) of curriculum that has direct explanation to EoC #8.
In summary, “FV” formula only applies to case where the portfolio being synthesized is identical to the index, otherwise this formula does not work.
In #8 its NOT (see the asterisk under Exhibit 1 of question), so the solution uses the more general beta based formula (which is Equation 5 in curriculum). FV formula is just not applicable here.