Creating cash out of equity and alter portfolio mix

CFA Level III Derivatives
#1

When altering the portfolio mix with futures, say 20mil out of 100mil equity will be reallocate to fixed income. We use equity futures to adjust Beta to 0 to resemble that I first convert the position to cash and then that portion of “cash” will be convert to fixed income with certain duration.

Which got me wondering, why is it a different formula than shown for “Creating cash out of equity” ? In synthetic cash, if we want to convert say mid cap US equity (beta=1.2) to cash for 3 month using US mid cap equity contract (beta=1.29). We simply use -V(1+r)T/qf. Why we ignore the difference between the different beta of stock holdings and stock futures?

thanks in advance

#2

Bozaigao,

This is a good question. I think the technique is different because the objectives are slightly different.

In the first example, the goal is to manage the systematic risk allocated to equities and bonds. When shifting the beta exposure, it’s necessary to use futures to adjust a portion of the beta exposure to 0.

On the other hand, your second example involves creating synthetic cash. The synthetic cash is creating by the combination of existing stock with short futures. The goal isn’t to manage beta exposure but rather create cash out of the equity position.

–Keith