1 THE TOTAL VALUE OF THE PORTFOLIO IS ¥55.0 BILLION AND THE...

Section 4.1

The total value of the portfolio is ¥55.0 billion and the 60% target allocation to equity

would be ¥33.0 billion, but the current allocation is ¥27.5 or ¥5.5 billion less. In order to

correct this discrepancy, the equivalent of ¥5.5 billion in bonds with a duration of 4.75

must be sold using bond futures (converted to synthetic cash) and then converted to

equity exposure with a 1.15 beta using stock futures. The number of equity futures

contracts to be bought is;

where β

T

is the target beta (1.15), β

S

is the beta of the synthetic cash position (0), β

f

is

the beta of the futures contract (1.05), S is the value of the stock being created from the

synthetic cash position (¥5.5 billion), and f

S

is the price of one equity futures contract

(¥1,525,000). Therefore, the number of contracts is;

3.) Which of these is most likely to be a characteristic of one of the two swaps Watanabe

describes to Sato?

A. Receive return on Nikko Bond Performance Index

B. Pay return on Nikkei 225 Index

C. Receive Libor

Answer = C

"Risk Management Applications of Swap Strategies," Don M. Chance