R28 Risk Managment Applications Of Forward and Futures Strategies Flashcards
Formula for calculating no of future contracts to buy in order to change the portfolio beta to target beta
(Target Beta - Portfolio Beta) / Futures Beta x Futures Price x Lot Size
What position creates a synthetic long position in stock or how do you equitize cash
Long Stock Futures Plus Long Risk Free Bond. This is also called Equitizing Cash
What position creates a synthetic long position in Cash
Long on Stock plus Short on Stock Futures
Can you Change asset class allocation or sector exposure withing equities using futures
Allocation between Equity and debt can be altered or adjusted using futures. Long Futures to add and short to decrease. Sectoral Index Futures can help with increasing and decreasing exposure to a particular sector.
Explain Transaction Exposure, Translation Exposure and Economic Exposure
Transaction Exposure : Is risk associated with change in price of foreign currency on a specific business transaction of purchase or sale
Translation Exposure : Is risk associated with conversion of foreign financial statements into domestic currecy
Economic Exposure : Is the risk associated with changes in demand and supply arising out of effects of change is exchange rates.
Is it Possible to hedge both the currency and equity risk precisely when investing into foreign equities
It is not possible to hedge the currency risk precisely as the amount of foreign currency at maturity will be unknown and will depend on the return generated for equities in that period. However it is possible to hedge the equity first and then know the precise amount and then book forwards for it. By hedging both risks only risk free rate can be earned.
When are forward contracts preferred over future contracts
When event is on a particular date.
large Foreign currency transaction are mainly done through forwards unless there are credit concerns.
Also when privacy is important.
