When changing my asset allocation with futures (assuming equity), I first set my target Beta to 0.0 to resemble that I first convert the position to cash and then set a new beta target that I want and solve the equation.
Which got me wondering, why is it a different formula than shown for Equitizing Cash…why wouldn’t the first step, setting Beta Target to 0.0, be the same as equitizing cash (if done for the entire portfolio).
if by equitizing cash - you are talking about a fixed income portfolio - they take cash duration most often to be 0.25 … so it is not 0 like in the case of equities. That is the only variation I have seen.
No, I understand that they do that. But what I mean, is that in the book, the make you solve this equation:
Nf = Vo (1+rf)^t / q x f
Then solve for Vo with a rounded number of contracts.
But when you are doing Asset Allocation with Futures, you don’t use that formula. I am wondering why.
you have to arrive at Nf first, round that up or down – then get back to how much u need to invest or convert to cash.
Agreed. I think I’m wording this poorly, but why in the Asset Allocation adjustment does it say that you set a Beta target of zero to reflect that you are converting it to cash…why is that not the same as the “equitizing cash.” In other words, at a high level they seem to be doing the same thing, but different equations…
equitizing cash is converting cash to equity. You have cash available which you will invest in a equity portfolio in a few months time - so your V0 today is converted to Vo (1+rf)^t/12 in t months time - with which you buy Nf Futures of equity. At this time there is no beta …
In the other case you have a V0 amount of a Equity portfolio with beta B - which you want to hedge using futures.