Synthetic Cash from Equity Futures

not any example with the synthesized cash or equity position, it does not.
so I am not convinced. Even when they solved it in the mock exam they did not use the beta. so I would go with that.
 
Middle of page 363 - first paragraph below the box:
“In the example here, we sell the precise number of futures to completely hedge the stock portfolio. The stock portfolio, however, has to be identical to the index. It cannot have a different beta. The other formula, which reduces the beta to zero, is more general and can be used to eliminate the systemic risk of any portfolio.”
I rarely understand these things through and through, so I must be wrong somewhere. I just don’t know where.
 
I read that too. However - whereas every other formula is written out in black and white - if this were so important - why wouldn’t they provide it?
 
I don’t know – it looks pretty clear to me, and it’s consistent with the rest of the reading. In any event, given a conflict between 2012 curriculum and a 2009 mock, I side with the curriculum.
 
Please help me in interpreting this on P.No 363
“If we apply that formula to a portfolio that is iden- tical to the index on which the futures is based, the two formulas are the same and the number of futures contracts to sell is the same in both cases.29

29 A key element in this statement is that the futures beta is the beta of the underlying index, multiplied by the present value interest factor using the risk-free rate. This is a complex and subtle point, however, that we simply state without going into the mathematical proof.”
 
After rereading also, I tend to believe that in synthetic cash from futures or synthetic index from cash, both the beta i.e. of the index & future should be identical otherwise the text says the two formula (i.e. the one where we alter the beta of the portfolio & here when create synthetic position) will be same.
How you Guys dealing with it? Memorizing & moving forward with a view that if there is question of creating synthetic position, will ignore betas.
 
I would ignore betas for a synthetic cash/equity postition.
That seems to be the CFA way for this type of question.
 
To the OP, I’m glad this whole question was raised – I could have easily overlooked one simple paragraph in 2,500 pages of text. Still, I think we assume that both betas are the same. If they aren’t, then the portfolio has residual risk.
 
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