Learning Module 5 Case Study in Portfolio Management: Institutional

CFA Level III Portfolio Management
#1

page 372, IN-TEXT QUESTION

“In general, the cost of rebalancing through futures is expected to increase with investment time horizon as mispricing or tracking risk increases. In this case, the impact of the cost of rolling the futures is not viewed as material, given that the roll of the short equity futures position would likely offset most of the cost of holding the long fixed-income futures position.”

first sentence easy to understand, but i struggle to understand second sentence - how does it work?

#2

Think of a situation where both equity and fixed income contract are in contango. (fwd > spot)’

There is a roll cost of the long bonds as the fwd prices approaches spot . There is a roll gain on the short. These won’t match exactly.

But I believe what they are saying is over time any gain/loss will be minor compared the actual price move of the underlying and that on avergage oveer time they will off set each other.

#3

i think that’s exactly what it means. thanks.