FINM2003 Study Guide - Final Guide: Global Macro, Liquidity Premium, Autocorrelation
Pure Play Example (eliminate exposure to market risk)
1. Manage a $2.1 million portfolio
2. Believe alpha > 0 and the market is about to fall, rm<0
3. Establish a pure play on the mispricing
4. The return on portfolio is
If
- Want to generate the 3% rate no matter what the
- Want to capture the 2% alpha per month but don’t want positive beta
- Because can’t buy the Index, but can buy and sell futures to establish exposure
to the underlying index
Hedge exposure
- By selling E-mini S&P 500 future contracts (every contract is $50)
- Go short in the market if expecting the market to fall
- After 1 month, the value of the portfolio will be
=
The Dollar proceeds from futures position (Short)
- If long is (F1 – F0 )
- F0 – F1 = S0 (1 + rf)-S1
Hedged proceeds= $2,163,000 + $2,100,000 * e
-$2,520,000 x rm cancels out + $2,520,000 x rm
Beta is zero and monthly return is 3%
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Document Summary
Pure play example (eliminate exposure to market risk: manage a . 1 million portfolio, believe alpha > 0 and the market is about to fall, rm<0, establish a pure play on the mispricing, the return on portfolio is. Want to generate the 3% rate no matter what the. Want to capture the 2% alpha per month but don"t want positive beta. Because can"t buy the index, but can buy and sell futures to establish exposure to the underlying index. By selling e-mini s&p 500 future contracts (every contract is ) Go short in the market if expecting the market to fall. After 1 month, the value of the portfolio will be. If long is (f1 f0 ) F0 f1 = s0 (1 + rf)-s1. ,520,000 x rm cancels out + ,520,000 x rm. Beta is zero and monthly return is 3%
