I’m feeling a little embarrassed trying to figure this out so close to the exam, but can someone help me with differentiating these two concepts? I thought I had them down but just got a Kaplan mock question wrong.
Would a question have to specify synthetic cash or equity for us to use V (1+rf)^T?
In other words, if we just read that someone wants to fully hedge their equity portfolio against market risk, we would just set Bt=0 and in the end not use V (1+rf)^T, right? Whereas, if they actually want the synthetic cash return we ignore all Betas in the formula and use V (1+rf)^T/full contract price.
Am I off on this?