MIS 4500 Lecture Notes - Investment, Futures Exchange, Forward Market

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Chapter 41: risk management applications of forward and futures strategies. Strategies and applications for managing equity market risk: Beta: dollar beta: beta times portfolio value; for futures, beta times futures price, number of futures contracts to obtain target beta: Creating equity out of cash: long stock = long risk-free bond + long futures: rounded off number of futures contracts to buy: ; resulting investment is no longer v but v*: ; and dividends are treated as 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 number of contracts by the dividend reinvestment) is. ; however transaction does not actually capture dividends, just the performance of the index: equitizing cash: do above transaction; maintains liquidity of cash, consider the under/over pricing of the futures. Creating cash out of equity: long stock + short futures = long risk-free bond: effectively convert (v/s)(1+ )t to cash;

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