Synthetic future contracts - white knight!

CFA Level III Derivatives
#1

Dear all - please can you help straighten out my confusion:

  1. To create synthetic equity from cash, we use the FV of the contracts using the PV of the equity contract X Risk free rate until contract expiry?

  2. However, for asset reallocation we don’t seem to use FVs? For example, Q9 2014 AM reallocates 105m to equity from bonds for 3months but we use the PV 105m rather than the FV based on PV X Rf. The answer talks about needing synthetic cash, as well but there is no adjustment of the PV?

  3. Finally, equity snthetic positions talk about ’ exposure for 3 months’. I think i’m finding this misleading- i understand there is synthetic exposure for 3 months to equity, but at contract maturity, permanent exposure to equity after the 3 months. Is this right, or have I got mixed up…

Thank you in advance for help

#2
  1. to create equity from cash, you use this formula

Nf = V(1+r)^t / qf

The formula is in cfa curriculum.

#3

Follow-up question since we are on the topic. Most of the synthetic equity and synthetic cash questions give you a dividend rate in addition to the risk free rate. Is this just trying to throw you off or under what circumstances would the dividend need to be account for?

thanks

#4

That would be needed if we were asked to determine the number of units of stock that were effectively purchased at the start of the period.

After rounding the number of contracts, you multiply that rounded result by the multiplier then divide by (1 + dividend rate)^T

Hopefully we’re not asked to do this on the exam but you never know. The curriculum has some really good examples.

#5

Gotcha(i think), thanks. So find the FV of notional using Rf and divide by futures cost to get the number of contracts and then PV that FV using the dividend rate to get the equity exposure implied by the futures position?

#6

Thanks, but this only really confirms the first question. I’m more mixed up with the difference between scenarios 1&2, and the terminology used in 3 …please…

#7

Dear all - please can you help straighten out my confusion:

  1. To create synthetic equity from cash, we use the FV of the contracts using the PV of the equity contract X Risk free rate until contract expiry?

  2. However, for asset reallocation we don’t seem to use FVs? For example, Q9 2014 AM reallocates 105m to equity from bonds for 3months but we use the PV 105m rather than the FV based on PV X Rf. The answer talks about needing synthetic cash, as well but there is no adjustment of the PV?

  3. Finally, equity snthetic positions talk about ’ exposure for 3 months’. I think i’m finding this misleading- i understand there is synthetic exposure for 3 months to equity, but at contract maturity, permanent exposure to equity after the 3 months. Is this right, or have I got mixed up…

Thank you in advance for help

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white knight needed pretty please…

still hoping someone can help out please with 48 hours to go