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MIS 4500 (31)

Chapter 41.docx

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Management Info. Systems
MIS 4500
Pourang Irani

Chapter 41: Risk Management Applications of Forward and Futures Strategies Strategies and Applications for Managing Equity Market Risk:  Beta:   cov SI  I o Dollar beta: beta times portfolio value; for futures, beta times futures price      S  o Number of futures contracts to obtain target beta: N f  T S     f  f   Creating equity out of cash: long stock = long risk-free bond + long futures T o Rounded off number of futures contracts to buy: N  V 1r  ; resulting f qf * * N ff investment is no longer V but V*: V  T ; and dividends are treated as 1r  reinvested and result in larger number of contracts than if just received the dividends, the implicit number of contracts starting with (growing to the previous * N f number of contracts by the dividend reinvestment) is T ; however 1  transaction does not actually capture dividends, just the performance of the index o Equitizing Cash: do above transaction; maintains liquidity of cash o Consider the under/over pricing of the futures  Creating Cash out of Equity: Long stock + short futures = Long risk-free bond o Effectively convert (V/S)(1+δ) to cash; T * V 1 r  o N f 
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